US banks pile up Treasuries

Banks have been net buyers for 12 straight months as deposits surpass loans

NEW YORK: American banks are loading up on US government debt, a sign they remain cautious on the economy even with the jobless rate at a six-year low and corporations at their healthiest in a generation.

Commercial lenders increased their holdings of Treasuries and debt from federal agencies in September by US$54bil to an unprecedented US$1.99 trillion, data from the Federal Reserve show. Banks have now been net buyers for 12 straight months.

Bank of America Corp (BoA) and Citigroup Inc are among the lenders adding government bonds this year as loan growth fails to keep up with record deposits and banks prepare for rules that take effect in January requiring them to hold more highquality assets.

While companies in the Standard & Poor’s 500 Index are earning more than ever and carrying the lowest debt burdens in at least 24 years, the buying suggests that loan officers are less sanguine over the outlook for the US economy.

“There’s extra cash the banks have to put to work,” George Goncalves, the head of interest-rate strategy at Nomura Holdings Inc, said by telephone on Sept 29.

“It’s not being fully utilised because of less demand, but also the banks have to be much safer,” which is why they’re buying Treasuries.

The banking industry’s appetite for US government bonds has helped Treasuries gain 4.2% this year and pushed down yields on the benchmark 10-year note by more than half a percentage point to 2.43% last week.

The yield was 2.44% yesterday as of 12:04pm in Tokyo.

Banks’ holdings of US government debt securities rose last month by the most since 2010, even as Treasuries slumped on deepening concern the Fed would end more than six years of near-zero rates sooner than some investors expected. The 0.6% decline was the biggest monthly loss of 2014.

Futures traders are now pricing in a 52% chance the central bank will increase its target rate in July.

After culling government bonds last year for the first time since 2007, lenders have addedalmostUS$180bil this year, data compiled by Bloomberg show.

Banks have stepped up their bond purchases as deposits have ballooned to US$10.37 trillion, the most since the Fed data starts in 1973.

Lenders accumulated so much cash that deposits exceeded loans by the most on record last month. That gap has widened by more than US$300bil in the past year. — Bloomberg