U.S. Treasury taps big holders of 20-year bond after 2023 shortage

The U.S. Treasury Department in Washington, DC, US, on Tuesday, June 25, 2024. (Ting Shen/Bloomberg)

(Bloomberg) -- The U.S. Treasury Department asked large holders of a 20-year Treasury bond at the end of last year — when the issue became expensive for traders to borrow under repurchase agreements, a sign of scarcity — to identify themselves.

Tapping rules used sporadically since the 1990s to guard against market manipulation, the department said anyone whose position in the 4.75% bond maturing in November 2043 amounted to US$1.6 billion or more as of Dec. 19 or Dec. 29 needs to report back to the government by July 15, according to a statement released Tuesday.

The bond was the most recently issued 20-year Treasury at that point, and following a series of steep cuts to the size of 20-year bond auctions, they sometimes became difficult to obtain in the funding market. Federal Reserve data show a spike in failures to deliver 20-year Treasury bonds during the week ended Dec. 27, an indication of scarcity.

According to Treasury officials, the bond’s scarcity in the repo market was part of the reason for making it the subject of their latest large-position reporting request. The protocol established in response to a Salomon Brothers bond-market scandal aims to prevent improper trading activity, such as efforts to corner the supply of a security to drive up the cost of closing short positions.

This is the 21st such request to date, with many prior instances having included periods when a specific security became scarce and expensive to borrow. The last time the department requested large-position data was on July 11, 2023 — tapping information on bills, rather than a note or bond, for first time.

The Treasury officials said the choice of the 20-year for the latest request was to better understand its supply and demand dynamics. After the disproportionately steep cuts to its size in 2021 and 2022, the sizes of 20-year auctions increased less than other tenors when growth resumed in August.

The 20-year bond at issue was created via three auctions in November, December and January totaling $42 billion. At their peak, 20-year bond issue sizes were $75 billion.

Twenty-year bonds were reintroduced in May 2020 after a three-decade hiatus with the aim of broadening the customer base for US government debt at a time of growing borrowing needs. The Treasury greatly reduced the size of its 20-year bond issues when it became clear that it had overestimated demand for the product. The 20-year remains the highest-yielding of the US government’s fixed-rate borrowings beyond the five-year point, a sign of weak demand.

The department had announced in May that they’d be conducting a large position report during the following three months. The Treasury’s debt-management teams have tended over recent years to ask for these reports about once a year.

--With assistance from Alexandra Harris.

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