Historic Repo Market Insanity: 10Y Treasury Trades At -4% In Repo Ahead Of Monster Short Squeeze

Whatever Powell does, he will have to do something to unfreeze not just the bond but now also the repo market, as the alternative is a market this is now literally broken, something former NY Fed repo guru Zoltan Pozsar predicted last week (see "Here We Go Again: Zoltan Warns Repo Market On Verge Of Major Shock As Key Funding Rate Turns Negative").

And speaking of Pozsar, this is what he said in his latest Global Money Dispatch note which we touched on earlier:

For every macro narrative that explains why U.S. treasury yields are rising, there is also a plumbing narrative that can explain things with equal persuasion.

So yes, Powell and the Fed could ignore the rise in yields as long as the turmoil did not spread to the repo market - such a move could be explained by the reflationary macro narrative - but now that the 10Y is trading below the fails charge in repo the repo market is officially cracking and as Sept 2019 taught us, there is nothing that the Fed is more worried about than the sanctity of the repo market.

Finally, what happens if we are right and Powell does assure the market that SLR will be extended? Well, since all of the pent up uncertainty about whether or not bank balance sheets will be usable after March 31 will disappear, what will happen is a monster short squeeze as all those shorts that pushed the 10Y to -4% in repo panic and scramble to cover, sparking a massive surge higher in prices (and plunge in yields), and since there will be immediate follow through to stocks where concerns about rising yields just sent risk assets plunging, we expect a monster move higher in stocks tomorrow. 

In fact, judging by the freefall in the futures, we wouldn't be surprised if the Fed announces that the SLR exemption will be granted at the usual pre-market time of 830am.

In any case, stay tuned because there will be fireworks - most likely to the upside - but if for some reason Powell refuses to unclog the repo market, there will be blood.

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