The number of outstanding five-year Treasury futures expiring at the end of the month has ballooned, far surpassing the eligible securities available to fulfill these contracts. The mismatch is causing the price of these futures to rise dramatically as counterparties scramble to avoid not having the Feb '09s to deliver.
The number of outstanding December futures contracts for Feb. '09 Treasuries is unusually high at 215,000 versus the 50,000 more typical for December. However, only $17 billion of the Feb. '09 Treasury issues exist to fulfill the $21.5 billion worth of contracts. As a result, investors holding the contract to deliver the Feb. '09 issuance are rushing to buy out of it, according to David Boberski, head of interest-rate strategy at Bear Stearns.
This demand is causing the Feb.'09s to trade roughly 200 basis points tighter in the repo market. Boberski said this kind of squeeze is relatively rare and occurs about once a year. The rush to buy out of the contract has pushed up the bid on the contracts by more than two and a half tics and could go higher.
"It's one of the most extreme squeezes in recent memory," according to Alex Li, interest-rate strategist at Credit Suisse First Boston.
Market participants speculate that the squeeze is being caused by a single institution, perhaps a hedge fund, holding large portions of both the December contracts and the Feb. '09s to see how high the contracts will be bid. Li declined to speculate on which institution was causing the squeeze and said he had not seen it becoming a more common tactic.