We know that demand for 10y US Treasuries are high in the repo market, given how they traded “special” in early March ‘21. While negative repo rates tell us that demand for 10 year Notes is very strong, it does not tell us what factors are driving this demand. The best we can do is make educated guesses as to what these factors are, for e.g. repo collateral shortages and demand from short sellers.

What is strange, and very contradictory, is that high demand for 10 year Notes does not fit with higher 10 year yields, at all. What is going on here?

It is important to remember that US Treasury prices, and hence yields, are set via two different mechanisms; by auction in the primary market, and by supply/demand  in the secondary market. USTs are first auctioned by the US Treasury to the primary market, before the new issues are then traded in the secondary market as On The Run (OTR) Treasuries. This means that even though the secondary market sets daily prices, what happens in primary market auctions are also important indications of demand. 

Auction High Yields mark the lowest prices bid, and Auction Low Yields mark the highest prices bid (remember that prices and yields move inversely to each other). From the chart below, we can see that since the start of the Covid pandemic in March 2020, Low Yields have been bouncing off lows of about 8 bps (0.08%). 

Furthermore, we can see from the chart that the move higher in yields really took off in December last year. Prices in the primary market followed suit, with auction high yields moving higher in tandem with what the secondary market was doing. Strangely, Low Yields did not follow suit.

This indicates that a strong undercurrent of demand for US 10 Year Notes exists in the financial system. This should not be surprising given the ongoing collateral shortage in the repo market pushing large pools of capital to ensure that they have enough “safe” and liquid assets for their needs. Strong underlying demand could also stem from capital looking to lock in whatever yield they can get, in the fear (or expectation) that rates will move lower again.

Hence, the selloff in 10 year Notes belies strong demand for the securities in both the repo market and the primary market. Put another way, there are large players, in much less visible markets, more than happy to snap up 10y Treasuries even in the current environment. The fate of the 10 year Note really is not as clear cut as current narratives make it out to be.