“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)

"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

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Thursday, March 13, 2014

Fed Custodial Accounts Show Big Drop in Foreign Held US Treasuries

I have not commented on this for a long time but every week I do monitor the Federal Reserve's Custodial Accounts to try to get a sense of the amount of US Treasury obligations sitting "in the vault" in New York, held there for other foreign Central Banks.

I have been trying to get a sense of why we are seeing this general US Dollar weakness and have been at a loss to explain, especially of late during this geopolitical crisis over in Ukraine.

Take a look at the following chart of US Treasury Holdings by these Foreign Central Banks that are on deposit there in the Custodial account at the Fed.

Look at the steep plunge that has occurred since the beginning of this year. We have gone from a peak of near $3.021 Trillion to a current $2.855 Trillion. That is a drop of some $166 billion since the high point reached in the middle of December last year. Folks, that ain't exactly chump change.


Why this is occurring is unclear to me at this point but I feel it will be worthwhile to monitor this. As you can see on the same chart, we have seen episodes during which Foreign Central Banks tended to be fairly large sellers of Treasuries only to then have them return as big buyers. Much of course depends on their Balance of Trade with the US and how they sterilize their surpluses.

The steepness of the plunge is the largest I have yet observed on this chart in terms of the amount involved. In percentage terms, the reduction is approximately 5.5%.

I know that there are some that would be more than happy to jump on the bandwagon and attribute this to the outbreak of tensions surrounding the Ukranian crisis and all the chatter ( baseless in my view ) that Russia, even China and some throw in India, are threatening to dump US Treasuries as a way of waging a sort of financial warfare with the US should the West proceed with sanctions against Russia. However, this trend has been going on since the second week of December of last year, long before things flared up over there. Something else seems to be in play here, although I am unclear what that might be.

If global trade is slowing down, as some fear it will ( myself being among them), I can understand falling Dollar amounts being involved and thus a shrinking need for Treasury purchases for sterilization reasons. That would manifest itself, in my view, as a slower rate of purchases but not necessarily a dropping of the Dollar amount of Treasuries held in custody.

If that is the case AND if some of these Treasuries are maturing, and are not being rolled over in the new purchases, that would explain the shrinking number. It does make me wonder if that recent China data showing shrinking exports from that all-important nation, is indeed having an impact on these Custodial Accounts. This might be SOME of the reason behind the recent Dollar weakness.

Making this more interesting is the fact, that over that same period, from December 19,2013 (when the number of  Foreign Central Bank held Treasuries peaked) the Fed has purchased $98.6 Billion Treasuries as part of its ongoing QE program. While not the whole amount, it is still a fairly large number of Treasuries ( about 60% of the total reduction noted above).

The USDX closed at 80.75 on the week containing December 16,2013. Today it closed at 79.62. A little more than a full point but it does seem to me that some of this weakness in the greenback can be attributed to some of that reduction in those Treasury Custodial holdings.

As always, the more we learn of the doings across the global economy and the current financial system, the more factors we have to try to account for in attempting to understand the "why" behind changing money flow patterns.


  1. Dan, its nice to see someone else is now seeing this. I noticed back in December what appeared to be a liquidity issue in the markets. I did a little cross checking and found it looked similar to what we saw just before Lehmann. It continued to occur until the start of Feb. BTW, you can see the foreign selling on certain days early in the morning if you watch the 10yr and the DXY. The pre market will show a large sale in the 10 yr shortly followed by a sale in the USD as the money converts into other currencies. One final note, I don't believe for a minute that the FED isn't letting the market drop. I think it is part of their plan to get equity funds to go into bonds to bring down the rates. They understand that they can't keep juicing the QE so they now need the market money to do it for them.

    1. joekahan;

      Thanks for the very informative and insightful comment. Can you be so kind as to keep us all posted on any developments you might see in this regard?

      The Dollar weakness has been such a mystery to me during this Ukranian issue that I have doing as much detective work as possible as I try to find out what might be going on to contribute to this. It is so out of character with what we have seen in the Dollar since 2008 that I find it sort of like a piece of trash that shows up in your yard one day - you cannot help but notice it and are not sure who put it there.

      thanks again...

  2. Dan
    Outstanding article and analysis. The conspiracy and souls dollar crazies will have a ball when they plagerize this.

    1. Mike Ehlert;

      Thanks Mike....! Again this morning the Dollar is showing weakness even as the Yen continues to get a safe haven bid... it is odd, odd, and odder with this Ukranian thing continuing to bring safe haven flows into gold.

  3. Dan,
    Remember during China's Third Plenum meeting last November that top Chinese officials said a further expansion of their foreign currency reserves is no longer in China’ interest. In other words, they don't need any more US treasuries. They openly said this, so it is no surprise to me that US treasury holdings are no longer increasing like they have been for the past 5 years. Check out this article for more:


    1. Herman;

      Thanks much for the post and the link....

      I wonder what they would be doing with their big trade surplus from the US.. also, the TIC report should be revealing.. it is usually a bit dated but still tends to give us a sense of what country is doing what in regards to US securities and treasuries.


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