October 14, 2011
Over the weekend, we observed the perplexing sell off of $56 billion in US Treasurys courtesy of weekly disclosure in the Fed’s custodial account (source: H.4.1) and speculated if this may be due to an asset rotation, under duress or otherwise, out of bonds and into stocks, to prevent the collapse of the global ponzi (because when the BRICs tell the IMF to boost its bailout capacity you know it is global). We also proposed a far simpler theory: “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.”
In hindsight the Occam’s Razor should have been applied. Little did we know 5 short days ago just how violent the reaction by China would be (both post and pre-facto) to the Senate decision to propose a law for all out trade warfare with China. Now we know – in the week ended October 12, a further $17.7 billion was “removed” from the Fed’s custodial Treasury account, meaning that someone, somewhere is very displeased with US paper, and, far more importantly, what it represents, and wants to make their displeasure heard loud and clear.
Whether it is China – we do not know: we may have a better view in two months when the September/October TIC data hits, but even then it will be full of errors, as Direct Bidder purchases by the UK usually end up being assigned to China at the yearly TIC audit. And the sellers know this all too well.
What they also know is that over the next few days (or weeks – ZH tends to be a little “aggressive” in its estimates for popular uptake), as soon as the broader population understands what has transpired, concerns about the reserve status of the greenback will start to resurface, precisely as many have been warning.
And what has happened is that in six consecutive weeks, foreigners have sold $74 billion, or more government bonds in a sequential period of time than ever before.
So… perhaps it is time to reevaluate US intentions for a trade war with any of its “evil” mercantilist, UST-recycling partners. Unless, of course, they want $74 billion to become $740 billion, and to force the Fed to have no choice but to intervene, only this time not with a duration sterilized procedure, but one where the Fed has to buy everything that China et al are selling.
On the other hand, judging by the traditional reaction of various precious metals to this kind of fiat suicide, perhaps it is not such a bad idea after all…
Total holdings in the Fed’s Treasury custodial account and weekly change:
Trailing 6 Week Cumulative Total of custodial account Treasury flows.
This article was posted: Friday, October 14, 2011 at 3:33 am