Foreign Central Banks Furiously Dump US Treasuries: Record $47 Billion Sold In First Two Weeks Of 2016

Tyler Durden's picture

It's not just stocks have a terrible start to the year, in fact the worst start in history: so is the amount of US Treasuries held in custody at the Fed, a direct proxy for the holdings of foreign central banks, reserve managers and sovereign wealth funds who park owned TSYs at the NY Fed for convenience.

According to the latest Fed data, after a drop of $12 billion in the first week of the year, another $34.5 billion in Treasuries held in custody was sold in the week ended January 13, bringing the total to just $2.962 trillion, below the previous recent low recorded in early November, and at levels not seen since April 2015.

Indicatively since April, total US Treasury holdings have increased by $570 billion, meanwhile not a single incremental dollar has ended up in the Fed's custody account.


As shown in the chart below, the drop recorded in the latest period is the single largest weekly drop recorded since China commenced liquidating its Treasury holdings in mid 2014.


Adding up the flows from the first two weeks of the year reveals the worst and most custody holdings "outflowing" start to the year in history.


The size of the liquidation promptly got the rate community's attention.

On Friday afternoon, MarketNews cited Louis Crandall, chief economist at Wrightson ICAP, who said "we have seen declines of more than $20 billion (in such Treasury custody holdings) on each of the first two weeks of this year. While accounts are volatile from week to week, that is certainly consistent with increasing intervention activity" from foreign central banks needing money to intervene either in the foreign exchange market or in the stock market, he said.

"There is no way of knowing" exactly what such central banks sold, he added. "But it could just as easily have been liquidation of coupon securities."

As MNI further writes, most observers saw China selling as behind the drop in Treasuries holdings at the Fed. "Circumstantially, that's the conclusion that people would jump to," said Crandall.

Some said it is not just China: Aaron Kohli, analyst at BMO Capital Markets, was less inclined to point to China. "It's definitely a drop, but keep in mind, every foreign central bank is in there," he said.

One other observer said that the decline "should be foreign central bank selling" as opposed to routine rolling of maturing securities. "Those are very chunky numbers. We did not even get such large sales back in August 2015 when we knew there was such selling" in Treasuries to get money to fund buying of China stocks, he said.

Others, however, disagree: "That kind of size could only be China," said the observer. But he added that at the margin, other Asian central banks could have been selling Treasuries to raise dollars for foreign exchange or stock market intervention.

One trader said China "must be selling, along with others. Look at the Hong Kong dollar, also down big. It is a game of musical chairs, and everyone is devaluing at once. The U.S. dollar strength is apparent."

* * *

One trader who has put all this together, and has linked it to the abnormal moves in the Treasury swap market is Ice Farm Capital's Michael Green.

As he puts it, "those who chose to seek protection in rates are only experiencing middling success due to the continued inversion of swap spreads which have traded to record highs."

Now this has been repeatedly noted in the press as irrational – why would US government bonds be trading at a risk premium to swap spreads which carry bank counterparty risk?  I would suggest there is one very simple reason:



His conclusion is that "swap spreads appear to be blowing out because foreign holders of treasuries, namely China, are selling them at a record pace to defend their currencies.  Currency levels are under attack in China, Saudi Arabia and now Hong Kong.  The specter of 1997-1998 is again haunting the markets."

As Green frames it, "the key question is “How long can this go on for?”  Consensus is clearly that China, in particular, has a deep pool of reserves with which to defend their currency; I am less convinced.  Having seen some contrarian work on the subject, my belief is that China is a paper tiger – with very little reserves left to defend their currency.  Perhaps as little as three months given their current burn rate."

If accurate (and Green's calculation excludes the hundreds of billions China may need to leave on its books if its NPL credit cycle finally hits as Kyle Bass is currently anticipating) then the coming months could see an unprecedented shock out of China which having spent hundreds of billions to slow a record capital outflow, has no choice but to let its currency finally float freely, leading to the biggest capital exodus in recorded history.

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Haole's picture

Mike Hearn threw a tantrum this week, left Bitcoin development like a child and defected to the banks to create bankcoin.

He is literally irrelevant in terms of Bitcoin anymore as the code has already forked away from XT.

Hitlery_4_Dictator's picture

Ouch, this is going to hurt.

general ambivalent's picture

You call that catching a knife? This is catching a knife.

Nutsack's picture
Nutsack (not verified) williambanzai7 Jan 17, 2016 8:14 PM

-1 for Besmirching the memory of WBZ's most famoust celebrity, Bozo The Clown

Farmer Joe in Brooklyn's picture

Plenty of available supply for QE4....

indygo55's picture

That's it! I'm not gonna peddle any more fiction!


nmewn's picture

Paper burns, burn baby burn.

Tall Tom's picture

I called this months ago...maybe even years ago, right here on these pages.


As Foreign Central Banks' liquidity dries up, and they are staring insolvency in the face, they will liquidate anything and everything that they can in order to garner liquidity.


They will divest of their US Dollars and those will come back to the USA and flood our shores. Bonds are just claims on US Dollars.


The Foreign Central Banks will end up acting as the Weimar Germany proles and spend everything that they have in order to garner hard assets.


So the hyperinflation begins as a result of the deflation.


Next up...Japan...or maybe Brazil...


They do not need that many US Dollars as they are not buying that much Oil.

Dr. Engali's picture

Are we all having fun yet bitchez?

Northern Lights's picture

Loads.  Best part is, I talk to other's about this and they are either clueless, or don't want to believe it.

Boris Badenov's picture

Best part is, yields are going DOWN......'splain me that.

back to basics's picture

Yields are what the FED says they are. For every China there is a Belgium out there.

Dark Daze's picture
Dark Daze (not verified) Boris Badenov Jan 18, 2016 6:15 AM

As long as the bank in Belgium 'buys', then whatever is sold is also taken off the market immediately. So, the yield still goes down. And best of all, it's hiddent from Congress and the American population, sort of.

Winston Churchill's picture

Counterintuitive that the dollar rises and interest rates fall as people dump USTs,

but think of the actual mechanics.Those cashed out USTs must be paid in USD, therefore causing

a demand.So the USD will carry on rising until it blinks out like a burnt out filament.

The 0.01% win again, we all lose.

Bay of Pigs's picture

We need moar DOOM!


CAPT DRAKE's picture

Yes we are!  You simply can not buy this level of entertainment anywhere, for any price.   It is intellectually stimulating, reads like a well written novel, and is at the same time very predictable.

Better dust off your plan "B".  You need to shelter in place for 3 months, with water and food in stock. Trust no one, including your next door type as that person is the one most likely to shoot you. You do not want to be around a bunch of panicked people, and the father of a hungry 3 year old is the most dangerous person on the planet. 

If it goes past 3 months, then we are into full on Mad Max stuff.   90% of the population may die.

new game's picture

want to know the numbers? the great italian mathematician fortells the reversion. the frame of time is the tricky part. but since we are awash in oil, i would suggest a period of time since 1900.

if oil was an itergral part then much longer reversion time frame. this will be a mini reversion.

never mind the drunk driver white noise.

retrace of humanity. retrace of numbers...

not the 62 er..

a bouce from the crumble, ha

there is hope, ha again

Dark Daze's picture
Dark Daze (not verified) new game Jan 18, 2016 6:11 AM

Are you on drugs?

CHoward's picture

Everyone just needs to buckle up - this son of a bitch is about to blow!

yogibear's picture

Hopefully the Fed's Japan printing experiment and their own implodes.


Nutsack's picture
Nutsack (not verified) CHoward Jan 17, 2016 8:15 PM

On the magic negroe's watch? really?

lester1's picture

So if world central banks are selling US Treasuries, who the heck is buying them???

Dr. Engali's picture

The fed...., er I mean Belgium.

Consuelo's picture

The Exchange Stabilization Fund.



new game's picture

the secret wizard behind the curtain, follow the fed B>R>I>C road...

youngman's picture

The yalways say the Central banks are buying...WTF...this does not make sense

Dark Daze's picture
Dark Daze (not verified) lester1 Jan 18, 2016 6:09 AM

The Fed, surrepticiously through it's broker/dealers, to the tune of 1/2 Trillion in the last 6 months. Then they go to Brussels to be warehoused.

yogibear's picture

The Fed has a galaxies of digital cash. It's been currency wars.

How is devaluing the currency working out for Cannada?

FreedomGuy's picture

Essentially the sales are defensive measures for another and larger problem. On the other side of those sales are a lot of people equally eager to buy based on the bond prices.

Dark Daze's picture
Dark Daze (not verified) FreedomGuy Jan 18, 2016 6:08 AM

Uh no, there aren't. THe Fed is redeeming them with US Dollars, or did you miss that in the article. And the US dollars aren't going back into the Fed's overnight fund, they are going into China where people are foolishly stuffing them into their mattresses. I imagine once the dollar finally collapses the government in China will do some kind of a special redemption scheme to help people get rid of those greenies.

franzpick's picture

CB TB sales will soon exceed 100 bil/week as the decades-old impending fed-sponsored credit binge collapse comes into focus. We're in for surprising, debt cycle, contraction metrics.

yogibear's picture

Canad's loonie just headed south again.

People are going to take to the streets as the bankster's games take their toll on the small people.

Round-robin collapse.


Haole's picture

Personally, I can't wait to see all the smug, metrosexual faces turn to deer in the headlights.

Lucky Leprachaun's picture

Me too. And I wonder how much they'll be celebrating diversity when the EBT payments have stopped.

Dark Daze's picture
Dark Daze (not verified) Lucky Leprachaun Jan 18, 2016 6:05 AM

You don't know shit.

Dark Daze's picture
Dark Daze (not verified) Haole Jan 18, 2016 6:05 AM

IS it Haole, or just ahole? Canada alread has over 80 Billion in US dollar reserves, and unlike the US, we are adding 3 billion more PER MONTH to our reserves AFTER WE HAVE PAID ALL OF OR BILLS. THe biggest problem Canada has right now is two-fold. One, we have way too many US dollars given the unrpredictable and belligerent nature of Washington politicians, and two, our banks, the safest in the world, have been buyers of last resort for your treasury auctions for 8 years now. When the US dollar is devalued, or, Trump gets into the White House and defaults on foreign debt holdings, that is going to create a spectacular problem for us.

Hopefully China will put the final nail into you before any of that happens.

Haole's picture


You don't even seem to know I'm not a yank because I surmise you don't know much.

How about you take your remedial little lesson and go play hide and go fuck yourself Mr. 35 weeks.

Canadian banks, safest in the world?  You are a bright bona fide little assclown aren't you?

Underpinned by derivitives, collapsing industrial production and consumers 160+% dept to income.  Prime Minister selfie proclaiming he's going to blow-out deficit spending while rates are low?  20,000 or 30,000 refugees to support, for now..

You're just as fucked as anyone else and don't even know it, just another smug little douchenozzle Canada seems to be cultivating at a rapid pace.



Dominus Ludificatio's picture

I do not see the Bank of Canada buying US dollars or raising rates to prop up the currency. So dream on and hope your misery wish does not come back and bite you.

wet_nurse's picture

Then China goes to the gold standard holding zero UST. Their banking system will be in place and can tell the world, we had no choice. Then the death of the dollar and Babylon.

g speed's picture

I heard they were mining Uranus and had 1,000,000,000 tonnes---gold --wonderful gold---they have it all and I will have to sell my kids to get some cause everyone needs goooooold