Foreigners Sell Record $85 Billion In Treasurys In 6 Consecutive Weeks – Time To Get Concerned? | ZeroHedge

Last week, when we pointed out what was then a record $77 billion in Treasury sales from the Fed’s custody account, in addition to noting the patently obvious, namely that contrary to what one hears in the media, foreigners are offloading US paper hand over first, there was this little tidbit: “The question is what they are converting the USD into, and how much longer will the go on for: the last thing the US can afford is a wholesale dumping of its Treasurys. Because as the chart below vividly demonstrates, the traditional diagonal rise in foreign holdings of US paper has not only pleateaued, but it is in fact declining: a first in the history of the post-globalization world.” Well as of today’s H.4.1 update, the outflow has increased by yet another $8 billion to a new all time record of $85 billion, in 6 consecutive weeks, which is also tied for the longest consecutive period of outflows from the Fed’s Custody account ever. This week’s sale brings the total notional of Treasurys in the Custody account to just $2.66 trillion (down from a record $2.75 trillion) and the same as April of last year. And since the sellers are countries who have traditionally constantly recycled their trade surplus into US paper, this is quite a distrubing development. So while the elephant in the room could have been ignored 4, 3 and 2 weeks ago, it is getting increasingly more difficult to do so at this point, especially with US bond auctions mysteriously pricing at record low yields month after month. But at least the mass dump in Treasurys explains the $100 swing higher in gold in the past month.

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Foreigners Dump $74 Billion In Treasurys In 6 Consecutive Weeks: Biggest Sequential Outflow In History

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.

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Not Over by a Longshot – September 26, 2011

John P. Hussman, Ph.D.

All rights reserved and actively enforced.

On Friday, the yield on 1-year Greek government bonds closed above 135%. As I’ve noted in recent weeks, the bond markets continue to reflect expectations of certain default on Greek debt. All they are working out now is the recovery rate. As of last week, the expected recovery rate implied by bond prices stands at about 43% of face value. Since Greece is still running a primary deficit (it can’t pay its bills even if debt servicing costs drop to zero), my impression is that the eventual default may be even worse. Still, if I were to venture a guess, it would also be that Greece will be given a small amount of new funding in the coming weeks in order for the government to continue running and delay the inevitable. The reason is that Europe needs time to better prepare for a default, and European leaders appear to be scrambling to get banks to bolster their capital as quickly as possible (somehow investors responded to that news with a short-lived rally last week, as if the need to accelerate the timeline for banks to acquire additional capital is a good thing).

If you’re attentive to how European leaders are phrasing things these days, you’ll notice that (except for officials in Greece) they’ve stopped saying that Greece itself will not be allowed to default, and instead insist that the European financial system and the European monetary union will be defended. While it’s possible that the equity markets will mount a relief rally in the event of new funding to Greece, it will be important to recognize that handing out a bit more relief would be preparatory to a default, and that would probably be reflected in a failure of Greek yields to retreat significantly on that news.

As for the euro itself, we presently estimate the value around $1.42, which wouldn’t change much unless Europe inflates to avoid peripheral defaults. Ultimately, the value of a currency is determined by relative price levels and interest rates (see Valuing Foreign Currencies ). While the euro may come under pressure as default concerns develop, we actually expect the euro to survive among its strongest members, with some fiscally unstable peripheral members exiting and pegging instead. So we’re not particularly compelled by the notion that the euro will collapse if Greece fails, and with European equities looking increasingly reasonable on a valuation basis, we’re inclined to use significant further weakness as a longer-term opportunity. Massive buying of peripheral debt by the European Central Bank would dramatically weaken the prospects for a stable euro, but there seem to be more responsible policy makers overseeing the ECB than we have at the Federal Reserve.

On the bright side, our estimate of the return/risk profile for stocks moved from hard-negative to more moderately negative last week. It’s a start. Undoubtedly, the best chance for a sustained advance (aside from short-term spikes on short covering or bailout hopes) would be for that advance to begin from significantly lower levels. Unless we observe a robust improvement in market internals from current levels, which appears doubtful given further confirmation of oncoming recession, the broad ensemble of data we observe doesn’t offer much latitude to establish a constructive position based on, say, weak technical reversals or other scraps that the markets might toss out in the near term. The first 13 weeks of a recession are among the most predictably hostile periods for equities in the data. We’ll take our evidence as it comes, but the primary risks – recession, default and global credit strains – continue to increase

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via Hussman Funds – Weekly Market Comment: Not Over by a Longshot – September 26, 2011.

Has Operation Twist Played Out Already? Time to Short Bonds?

Mish’s Global Economic Trend Analysis: Has Operation Twist Played Out Already? Time to Short Bonds?.