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The Flashing Market Indicators To Watch For

Monday, October 24, 2011, 10:14 AM
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The Flashing Market Indicators To Watch For

Monday, October 24, 2011

Executive Summary

  • Foreign official demand for US Treasurys is at its weakest in five years
  • Fed insiders are increasingly voicing the need for more stimulus
  • Why the US stock market will crash before the bond market does
  • The key metrics to watch closely as this story unfolds
  • Why higher prices AND higher unemployment are on the way

Part I - The Real Contagion Risk

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II - The Flashing Market Indicators To Watch For

Custody Account Holdings Fall

In Step #1 (in Part I), the first thing I am watching for is a decrease in central bank holdings of Treasury debt. The easiest way to track this trend is through the custody account at the Fed, which is where most of the official holdings of US government securities held by foreign central banks are stored. In this custody account are both Treasury and Agency debt; luckily, they are reported independently. 

It’s still early in the day on this story, but notably we've just witnessed the largest two-month drop in the custody account in the past five years. Maybe it means nothing and will soon reverse, but it is possibly also the first warning sign that something has dramatically shifted in this story.
 
Here’s the data. Let’s start with the total amount of custody holdings over the past 20 years.
 

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