"Threads In A Foreboding Tapestry" (Bond Market Coming Apart)

About 6 weeks ago, something changed. [Foreign Central Banks] not only slowed their buying of Treasuries, they stopped altogether, reversed course and actually began selling them. Three weeks ago their selling reached a level that I characterized in my weekly Treasury update for subscribers as "dumping." It was simply unprecedented. I opined that this could be the beginning of the end of the Treasury bull market, in spite of any effect that the Fed's new Operation Twist might have.

In fact, I expected that effect to be nil, and it has been. If anything, the announcement of Operation Twist, where the Fed offered to buy long term Treasuries from the Primary Dealers while simultaneously selling them short term paper, rang a bell for some investors. The Fed's announcement told them that the time had come to sell their long term paper. If the Fed was buying, they decided that they would be glad to sell.

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The [big banks, who are the Fed's primary dealers] appear to be in trouble. They began selling off their fixed income paper of all types in early September. That accelerated to what I can only characterize as wholesale dumping in the weeks ended September 21 and 28. It is no coincidence that those where the weeks where we began to see yields reverse from their record run.

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Something is rotten here. These are signs of major systemic stress.