EDITOR NOTE: Wouldn’t it be great to get paid for borrowing money, to earn interest on top of the money borrowed? Talk about moral hazard. Well, that’s what happened to US Treasuries yesterday in the overnight lending market--the repo market, where large private and government financial institutions borrow and lend on a short-term basis. We’ll not get into the details, as the complexity requires a whole article just to explain what the repo market is and how it works. The main point, however, is that the idea of negative rates is upside down, aberrant, a heretical inversion of the natural economy. In a natural economy, you get rewarded for taking the risk of lending money to someone else. The idea of “paying” someone to take the risk of lending money to that person seems insane. Yet, that’s become common to many “modern” economies. Only the hand of intervention can force such an aberration and call this state of denatured reality “natural.” Yet that’s what the Fed is doing to Treasury yields, forcing them to operate in the negative (an effect of inflation that’s supposedly “non-existent”).
The cost of borrowing U.S. Treasuries in the overnight repurchase agreement, or repo market, went negative on Thursday caused by the recent sell-off in rates, traders said.
Dan Belton, fixed income strategist, at BMO Capital said the U.S. 10-year Treasury is "trading special" in repo, meaning that in order to lend cash to borrow the security, the lender must pay the current rate of three to four basis points.
Originally posted on Yahoo! Finance