U.S. Treasury questions dealers over TIPS rout, repo fails

NEW YORK, July 12 Fri Jul 12, 2013 1:02pm EDT

NEW YORK, July 12 (Reuters) - The U.S. Treasury is asking primary dealers in the U.S. government bond market if they have any advice over how to mitigate liquidity issues that have emerged in inflation-linked bonds and in the $5 trillion repurchase agreement market.

U.S. Treasuries Inflation-Protected Securities (TIPS) were pummeled after Federal Reserve Chairman Ben Bernanke said in June that the central bank may start paring back its bond purchases this year. Traders said that weakness was exacerbated by the debt's relative illiquidity and because everyone headed for the exits at the same time.

The Treasury is now asking dealers to comment on the supply and demand dynamics in the TIPS market, and say whether they have any advice that could help demand for the debt in its auctions and improve liquidity in secondary trading of the bonds, the survey showed on Friday.

The question is part of the Treasury's regular questionnaire of its 21 primary dealers before it announces its quarterly refunding schedule.

The Treasury is also asking for comments about an uptick in settlement problems relating to 10-year notes trading in the repo market. Some traders have scrambled to obtain these notes in recent weeks, resulting in the debt trading at very negative levels and in some cases failing to settle.

Persistent negative rates can be disruptive to lending in money markets.

Dealers are being asked to comment on whether they think the issues will persist, and if there is anything that the Treasury could do to prevent or mitigate the problems.

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