With the state of the “dollar” being what it is, including the devastating darkening afforded by negative swap spreads everywhere, it isn’t exactly surprising to find that primary dealers continue to hoard UST collateral. By September, dealers were reporting a net positive balance of all coupon holdings of nearly $60 billion. With everyone in the world predicting higher interest rates, including the banks themselves, it seems an odd pairing for dealer inventories to suddenly surge with longer maturity bonds and notes. In early July, after all, the net position was almost exactly neutral.

Dealer activities are, like most wholesale arrangements, misunderstood from any traditional monetary standpoint. Even that isn’t very surprising given that this kind of behavior is relatively new; dealers didn’t truly depart until the 21st century, and securities lending in repo isn’t much advertised or discussed. But if we calibrate dealer activities going back to the mid-2000’s, their footprint becomes clearer as does motivations and inferences about relative changes.

Until late July 2007, with a sharp reversion early that August, dealers were persistently “short” UST coupons around $100 billion to $150 billion. Those were massive positions but wholly unrelated to actual investments or even primary market warehousing. Instead, dealer inventories were accumulated in the robust securities lending business which was a constant and steady supply of “rentable” collateral for repo. Thus, the transition starting in July 2007 makes sense under terms of suddenly suspect rehypothecation chains and counterparty risk. Like the rest of the euro/dollar system, this element of “dollar” liquidity eroded in waves so that years later by the time of QE3 (and undoubtedly one reason “convincing” Bernanke to act not once but twice in late 2012) dealers were almost as likely in net holding terms to hoard collateral as they once were to submit it into the liquidity market.