Two weeks ago when we reported that there had been a record consecutive week dump of US Treasury paper in the Fed's custodial account, as reported by the weekly H.4.1, we made the assumption that this was China preemptively selling US paper. Well, that may or may not have been the case, but it was only part of the full story. We have now learned that Europe, and especially Germany has been just an active seller of sovereign bonds, most certainly including US paper, in recent weeks. As FAZ reports, the head of Commerzbank Martin Blessing has been dumping all bonds in his possession, primarily PIIGS paper, but also US and German ones. He does add the clarification that this has been a complicated project as there has been a buyer's strike (and with the CDS extinction it will only get more difficult as there is no natural hedge remaining), and his dumping has certainly not made things easier. Now as we all know by now, when starting a panic exodus, one has to be first, be smarter, or cheat. Here we will add a fourth one: or sell US paper. After all the demand for this is nearly insatiable, or so the neo-Keynesians out there will have us believe. Well, in the last week, someone used our definition. According to today's update in the H.4.1, the total amount of securities held in the custodial account for foreign official and international accounts just plunged by $20 billion, of which $19 billion was attributable solely to Treasurys: the second largest weekly dumb ever. And since this total number includes both Treasurys, which are used for political purposes, as well as Agency securities, which don't really serve much in terms of a diplomatic statement but are great at shoring up liquidity, one can assume that the relentless selling in all types of US paper has had one purpose only: to generate capital. As the third chart shows, that amount is substantial: in the last 8 weeks foreigners have sold a unprecedented $93 billion across the custodial account bringing it to $3.392 trillion, the lowest since March 2011! So the next time someone asks where European banks are finding emergency liquidity now that commercial paper, money market and Libor Markets are all dead, you will have the answer.

Chart 1: Total Treasurys held in custody and weekly change: in the past week $19 billion worth of Treasury paper was sold, the second largest weekly amount ever.



Chart 2: Total securities held in custody and weekly change: in the past week, $20 billion worth of paper has been sold.

Chart 3: Rolling 8 week change in the Fed's custodial account