December 30, 2011
With year end fund flows making absolutely no sense for the most part, thank you global central planning, as the euro plunges and the market refuses to follow, with risk assets rising on speculation the ECB (and/or Fed) are about to restart printing yet gold collapsing (on one or two hedge funds liquidating, yet econ PhDs already rewriting their theses on why the “gold bubble has popped”), and finally with Treasurys soaring to near all time highs (10 Year under 1.9% yesterday even as stocks surged on data from the National Advertisers of Realtors, aka NAR, of all fraudulent and corrupt entities), here is the latest observation to make the confusion complete. As the Fed’s critical H.4.1 weekly update shows (which is leaps and bounds more accurate than the Treasury’s TIC international fund flow data), in the week ended December 28, foreign investors sold the second highest amount of US bonds in history, or $23 billion, bringing total UST custodial holdings to $2.67 trillion, a level first crossed to the upside back in April. This number peaked at $2.75 trillion in mid-August, and as the chart below shows the foreign holdings of US paper have been virtually flat in all of 2011, something which is in stark contrast with what the price of the 10 Year would indicate vis-a-vis investor demand. And going back further, the last week is merely the latest in a series of Custodial account outflows.
In fact, in the last month (trailing 4 weeks), foreigners have sold a record $69 billion in US paper, a monthly outflow that was approached only once – in the aftermath of the US downgrade (when erroneously it is said that a surge in demand for US paper pushed rates lower – obviously as the chart shows nothing could be further from the truth).
So here is the conundrum for today: did China continue to dump US paper in the year end, something we saw started with the October TIC data, or was it French banks continuing to sell off any non-EUR assets, and in the process repatriate proceeds, keeping the EUR higher. We don’t know, nor frankly, in this uber-centrally p(l)anned market, do we care much any longer.