Mish, can you help maybe in trying to force more transparency from the NY FED regarding securities lending? In a nutshel, NY FED lends treasury bonds to primary dealers at 11:30AM every day - which in turn are probably turned over and rehypothecated by those guys in the now very stretched repo market (among other things to short treasuries...). Primary dealers continue to pay 0.05 on those security loans even though for the last 2 years 3-month interest rates have gone up more than 1%! Why is this not discussed! If my interpretation is correct, this not only sounds wrong - it's borderline criminal. It is supposed to be an "auction" between primary dealers, yet the 0.05 loan rate is always the same, for a few years now....

I will have to pass that on to someone who knows more about Treasury operations than I do.

Reply From Pater Tenebrarum - I passed on your question to him:

This is because it is just a spread - basically the spread between the collateral rate and the rate charged for the security to be borrowed. You have to look at it as akin to a swap (e.g. dealer wants treasuries, and pledges some other security as collateral in return - so you only charge a small fee; although as I understand it, cash is also used as collateral). Bid increments are traditionally 5 basis points, and apparently demand is usually not so high to make higher bids necessary, but occasionally you do see much higher fees being charged - usually when a specific security is in strong demand and the Fed only has little of it in inventory.

I don't think there is anything sinister about it - the main purpose is to ensure a liquid repo market and prevent too many delivery fails from accumulating - particularly in the wake of QE, in the course of which the Fed has laid claim on a lot of supply.

I'm sure you can look up more details on this at the SOMA desk website of the NY Fed.