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NEW YORK, June 10 (Reuters) - Some interest rates in the $5 trillion U.S. repurchase agreement market turned negative this week as traders stepped up bets that U.S. Treasuries yields would rise after the latest labor market report pointed to an improving economy.
In the repo market, banks and Wall Street firms raise cash from investors to fund loans and trades by pledging a security as collateral. When the repo rate turns negative, the lender pays the bank or Wall Street firm to own the security.
The overnight repo rate to borrow 10-year Treasuries held at minus 3.00 percent early Tuesday, little changed from Monday. The rate is equivalent to the penalty for a bank or Wall Street firm that fails to deliver the security to the investor.
It was also the first time in a year that the repo rate on 10-year Treasuries hit this negative level, analysts said.
On Friday, the Labor Department said U.S. employers hired 217,000 workers in May, with the gains marking the recovery of the 8.7 million jobs lost during the recession.
Even so, another month of solid job gains did not spur many worries the Federal Reserve might raise short-term interest rates before the second half of 2015.
"The economy is improving, so the next logical move for the Fed to move rate higher, even though it might not be a year-and-a-half, two years from now," said Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut.
Bets that benchmark 10-year yields will rise have paid off since June, but they have not fared well this year overall.
Benchmark yields have increased 19 basis points since the beginning of June to 2.64 percent on Tuesday, but for the year-to-date the yields are down 37 basis points, according to Reuters data.
News of a 1 percent economic contraction in the first quarter hurt investors' outlook and stoked demand for bonds.
However, some traders continued to bet that U.S. yields will rise this year.
Data from the Commodity Futures Trading Commission released on Friday showed speculators raised their bearish bets on 10-year Treasuries futures last week.
The bearish, or short, bets exceeded the bullish, or long, bets in 10-year T-note futures on June 3 by 43,675 contracts, which was greater than the previous week's 19,078 but less than the 155,174 contracts recorded two months earlier.
Some traders downplayed the negative repo rate as a short-term play ahead of the U.S. Treasury Department's auction of $21 billion in a prior 10-year Treasuries issue on Wednesday, which is part of this week's $62 billion in coupon-bearing supply.
"It's just an auction squeeze we see at the first reopening of a 10-year issue," said Thomas Roth, executive director of U.S. government bond trading at Mitsubishi UFJ Securities USA in New York. He expected the 10-year repo "specialness" to subside after the 10-year note supply settles next Monday. (Reporting by Richard Leong; Editing by Leslie Adler)