Core Insights - The Federal Reserve's data indicates that the failure to deliver ten-year U.S. Treasury bonds has surged to its highest level in eight years, primarily due to the Fed's ongoing balance sheet reduction since 2022 [1] - As of the week ending December 10, the total amount of failed settlements for the latest issuance of ten-year Treasuries reached $30.5 billion, marking a new high since December 2017 [1] - The repo rate for this type of Treasury bond has fallen into negative territory, with holders willing to lend bonds at negative rates, leading to an increased likelihood of delivery failures [1] Group 1 - The shortage of bonds is partly due to a significant reduction in the amount held by the Federal Reserve during the November auction [1][2] - In the November auction, $42 billion of ten-year Treasuries were sold to investors, with the Fed only applying for an additional $6.5 billion to replace maturing debt, a stark contrast to earlier in the year when the Fed's additional purchases were significantly higher [2] - The decline in the Fed's purchases is attributed to a decrease in the size of maturing bonds in the System Open Market Account (SOMA), with maturing bonds slightly below $22 billion in November compared to $45-49 billion in earlier months [2] Group 2 - The Fed has been implementing a balance sheet reduction policy since mid-2022, only reinvesting in maturing Treasuries when they exceed a monthly cap, which has increased from $30 billion in June to $60 billion in September [3] - The reduction in the Fed's holdings of Treasuries directly decreases the supply of borrowable bonds in the market, contributing to the observed delivery failures [3] - Analysts believe that the Fed's balance sheet reduction policy is having a substantial impact on secondary market liquidity, making settlement operations more challenging for investors [3]