This Is A Really Strange Development

Observing the eurodollar system as I’ve done for so many years, you have to be prepared for curve balls thrown at you. Just when you think you’ve got it clocked (sometimes literally), something changes and it all gets tossed out the window.

 

About a month ago, the Federal Reserve reported a sharp drop of UST’s in custody on behalf of foreign agents. I noted then, and remain convinced now, that was something like a collateral call. It happened the week of April 18.

 

Not surprisingly, the same data shows over subsequent weeks the amount of UST’s in custody continued to decline sharply. The four-week total (through the week of May 9, the latest available) is about -$66 billion. That’s an enormous drop, a level in the same class as other episodes where global liquidity problems were obvious.

 

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