Dear Friends,

By now we have all seen the rather disturbing news concerning Chinese shunning of US Corporate debt issues. The chatter is that they still view Treasuries and Agency Debt as okay, for now. The problem is that someone has been selling US Agency debt in large size for some time now. Look at the chart to see the trend among foreign Central Bank buying of US Agency debt as detailed from the US Custodial Holdings data at the Federal Reserve.

How that could be anything other than a vote of no confidence for the US mortgage debt market escapes me. With the troubles that continue to mount at Freddie and Fannie, this trend of foreign disinvestment of Agency Debt has to be taken seriously.

Note also the continuing run up in Treasury Debt being held by these same Foreign Central Banks. Above $2 trillion and rising.

When I look at this chart I am reminded of that old Johnnie Cash Song: “How high’s the water Mamma”. 2 feet high and rising, and rising, and rising and rising in the case of this gargantuan debt load that the US has heaped up for our children and their children to have to contend with.

We will continue to monitor developments in the debt category as the Treasury International Capital Flows data comes out. Even though it is dated, (two month lag time), it still is helpful in providing a window through which we can gauge foreign investment sentiment towards US debt offerings. As China is the largest holder of US Treasury debt, any trend towards disinvestment on their part carries ominous consequences for the US Dollar, especially as the trend in Agency Debt is certainly lower.

Click charts to enlarge today’s Custodial Holdings charts in PDF format with commentary from Trader Dan Norcini