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Spike in Failed Trades Exposes Persistent 20-Year US Bond Shortage

AInvestFriday, Jan 3, 2025 12:14 pm ET
4min read


The repo market, a crucial cog in the U.S. Treasury market, is once again grappling with a persistent shortage of 20-year bonds. The latest data from the Federal Reserve Bank of New York reveals a surge in fails to deliver, indicating a severe liquidity issue that has been plaguing the market for months. In the week ended Dec. 25, 2025, fails involving the 20-year Treasury exceeded $21 billion, the second-highest amount in history (Bloomberg, 2025). This alarming trend underscores the need for a more balanced and liquid repo market.

The scarcity of 20-year bonds in the repo market has several implications for the broader economy and financial markets. First, it increases borrowing costs for the U.S. government, as investors demand higher yields to compensate for the increased risk associated with the limited supply of these bonds. This, in turn, inflates taxpayer costs and puts upward pressure on long-term interest rates. Moreover, the persistent shortage can lead to market disruptions, increased price volatility, and a less stable repo market, which could have spillover effects on other markets and the broader economy.

To address this issue, the U.S. Treasury Department has taken steps to better understand the supply and demand dynamics of the 20-year bond. In July 2023, the Treasury requested large-position data from investors holding a specific 20-year bond that had become scarce (Bloomberg, 2024). This move aimed to shed light on the market's imbalances and inform potential regulatory adjustments. However, more needs to be done to ensure a more balanced and liquid repo market.

One potential solution is to increase the size of 20-year bond auctions, which would address the persistent shortage and alleviate the strain on the repo market. However, this approach must be carefully considered, as it could also lead to an oversupply of these bonds, creating new challenges for traders. Alternatively, the Treasury could eliminate the 20-year bond altogether, but this option may not be feasible given the government's long-term borrowing needs.



In conclusion, the persistent shortage of 20-year US bonds in the repo market has significant implications for the broader economy and financial markets. To address this issue, policymakers must consider a range of options, including adjusting auction sizes, implementing regulatory changes, or even eliminating the 20-year bond. By taking decisive action, the Treasury can help restore balance and liquidity to the repo market, ensuring a more stable and efficient Treasury market that benefits all market participants.

As investors, we must remain vigilant and adapt our strategies to navigate the challenges posed by the persistent shortage of 20-year US bonds. By staying informed and maintaining a long-term perspective, we can make rational decisions that position us to capitalize on opportunities as they arise.
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