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There is a twin problem for the U.S. in terms of its foreign central bank custodial holdings of U.S. Treasuries and agencies: No need and a need. By "a need" I mean that countries suffering in the current under-advertised developing nation currency crisis need to repatriate their reserves to shore their currencies and economies. Secondly, since the USD is inflated relative to those local currencies, those suffering countries get a bang for the buck out of bringing it home. This is an excellent opening to get rid of "no-need" dollar reserves.

When one sees a $20.4 billion custodial securities dump in one week on top of $5.5 billion the previous week it should be safe to ask if a problem is developing among the holders. Besides the Chinese (see "Gamechanger for US Dollar") and the crisis in developing nations, add in a Saudi "protest" and you have the ingredients for much higher Treasury yields. Interestingly, the Saudis hold more short term Treasuries and thus are in a better position than the Chinese to reduce holdings as they mature.

(click to enlarge)

(click to enlarge)

Yesterday, Chinese President Xi Jinping cryptically stated that China's dream is the pursuit of gold with the aspiration to seek "peaceful development in the world." This is, in fact, a rally call to those now in crisis that an alternative monetary system is about to be offered.

It is also interesting to note that inside players like George Soros are now pointing to China's debt and credit difficulties. I have been writing about China's debt, pollution and smog for years, but now it is front and center. This is not new news, but the timing and the agenda is illustrative. In another recent interview, Soros called on China to join the "New World Order," which is code for the status quo U.S. debt based hegemony. China isn't listening. Other developing nations have to be asking, "How do I get out of this chicken outfit?"

To understand why the developing countries aren't listening, look no further than the flavor-of-the-day maladjustments and the distortions now present in the global bond market. The current game is driven largely by momentum carry-trades off the Japanese Yen in particular. Suddenly and for no fundamental reason, Spanish 10-year sovereigns yield 3.97%, Italian 3.82% and Ireland 3.39%. Just a very short while ago, Italy was in political crisis, but that is now forgotten as the attention shifts to Turkey, India and elsewhere, where sovereigns are in crisis. Turkey and India shown below have spiked considerably.

Indian yields:

Source: Trouble With U.S. Foreign Reserve Creditors