Sunday, October 9, 2011
Something curious happened recently: for the first time in over a decade, perhaps ever, the US saw a record $25 billion worth of Treasury bond outflows from the Treasury’s custodial account in the week ended September 28. Just as curious is that in the past 5 weeks we have seen relentless selling of Treasurys from the same custodial account which, with Treasury International Capital data 3 months delayed, and largely incorrect until its annual revision, is the only real source of recent (and somewhat accurate) foreign activity in US bonds. In fact, starting with the week ended September 7, through last Thursday, foreigners appear to have dumped a massive $56 billion worth of Treasurys (don’t take our word for it – check it here, courtesy of the Fed). This is quite disturbing for two reasons. One explanation for this move would be to look back to the Quant crash in early August 2007, which preceded the market’s secular (and all time) high, when various quant funds blew up for reasons still not completely known. The reason why this date is important is that it was the catalyst for the next biggest concerted dump of Treasurys, when in a subsequent span of 4 weeks, foreigners sold $47 billion in Treasurys… but at least the market’s precipitous move lower was prevented, if only for a few brief months. Also curious is that the recent move is in direct contrast to the Custodial Account reaction to the Lehman implosion in 2008 when 20 weeks of consecutive UST inflows, beginning September 10, saw $300 billion in “safe haven” purchases. So while the market plunge back then was accompanied by a shift into Treasurys, this time around, the biggest market volatility since Lehman has seen a record sequential exodus out of bonds. Which begs the question: did Tim Geithner make a few phone calls, and tell foreigners to dump Treasurys (knowing full well Op Twist was coming and the Fed would backstop the entire curve), and to buy stocks instead in order to prevent the next relapse of the Great Financial Crisis?
Of course, there is a far simpler explanation: the dreaded D-day in which foreign official and private investors finally start offloading their $2.7 trillion in Treasurys with impunity (although not with the element of surprise – China has made it abundantly clear it will sell its Treasury holdings, the only question is when), has finally arrived.
Either way, if this is merely a function of money’s fungibility (according to , as is all too well known, capital simply shifts from one asset allocation to another), and money was forcefully “funged” from bonds into stocks (with or without the prodding of one Tim Geithner) to create a “natural” bid into the bidless market, expect to see even more bond liquidations should stocks continue sliding lower. That may be a big reason to panic as it means that finally the US has tipped its hand that its survival (read: that of the Russell 2000, thank you Ben Bernanke), is dependent on the generosity of our trade surplus partners.
If, on the other hand, the sell off is completely uncorrelated to any moves in the stock market, then the reason to panic is far, far greater, as it means that the international community no longer perceives US paper as a flight to safety…and has taken the first step to defect in the most important Nash equilibrium in modern history.
This article was posted: Sunday, October 9, 2011 at 4:40 am