Bloomberg News

Treasuries Irresistible to America’s Banks Awash in Cash

April 28, 2014

U.S Chamber Of Commerce In Washington

A "Jobs" banner hangs outside the U.S. Chamber of Commerce in Washington, D.C. The U.S. economy added fewer jobs on average in the first three months of 2014 than in the same period in the prior two years, data compiled by Bloomberg show. Photographer: Andrew Harrer/Bloomberg

America’s banks are regaining their appetite for U.S. government debt.

After culling Treasuries and bonds issued by federal agencies last year for the first time since 2007, commercial lenders such as Bank of America Corp. (BAC:US) have boosted their holdings every month this year, Federal Reserve data compiled by Bloomberg show. Banks now own $1.85 trillion of the debt, within 2 percent of the record amount held at the end of 2012.

With a lackluster job recovery and higher mortgage rates damping loan growth, banks are tapping record deposits to plow more money into government debt as regulations designed to limit risk-taking take effect. The demand helps explain why Treasuries are rising from the deepest losses since 2009, confounding forecasters who foresaw declines as a strengthening U.S. economy prompted the Fed to cut back its own bond buying.

“The economic situation is still not fully bared out and they have to do something with their cash,” Jeffery Elswick, director of fixed-income at Frost Investment Advisors, which oversees about $5 billion in debt securities, said in an April 23 telephone interview from San Antonio. “Banks have been big buyers of Treasuries. They need safe assets.”

Treasuries have returned 2.2 percent this year, rebounding from a 3.4 percent loss in 2013. The longest-dated government debt has rallied the most, with 30-year bonds surging 10.8 percent in the best start to a year since at least 1988, index data compiled by Bank of America Merrill Lynch show.

Treasuries Demand

Debt investors have embraced Treasuries this year as labor-market gains have proven elusive and consumer spending remains below the Fed’s target, even after the central bank flooded the U.S. economy with more than $3 trillion in cheap cash since the financial crisis to stimulate growth.

The simmering conflict between Russia and Ukraine has also boosted demand for the safest assets, upending forecasts by economists for yields to rise throughout the year as the Fed moves to scale back its monthly purchases of Treasuries and mortgage-backed securities.

Yields on the 10-year note, which reached a 29-month high of 3.05 percent in January, have since fallen and ended at 2.66 percent last week. The yield was 2.69 percent at 12:25 p.m. in New York.

The decline has spurred economists to cut their year-end projections in each of the past two months to 3.37 percent, data compiled by Bloomberg show.

Skeptical Lenders

While low borrowing costs have helped the U.S. fund itself as marketable debt obligations reached a record $12.1 trillion and allowed companies to repair their finances, the demand for Treasuries from lenders suggests they are skeptical over the strength of a consumer-led recovery, said Jeffrey Caughron, who advises community banks with more than $42 billion in investments as an associate partner at Baker Group LP.

Commercial banks have boosted their investments in U.S. government debt by $42 billion this year, rebounding from the first annual drop in six years, the Fed data show.

Bank of America, the only U.S. bank among the five biggest to publicly release a breakdown of their available-for-sale assets in a supplement to their first-quarter earnings, tripled government debt to $29.6 billion in the first three months of the year from $8.95 billion at the end of 2013, the data show.

Citigroup Inc. (C:US), the New York-based lender that received a $45 billion bailout during the credit crisis, increased government bonds to $87.6 billion in the fourth quarter from $82.6 billion at the end of the third quarter. The bank had cut the securities in the first three quarters of 2013.

Crisis Hangover

Banks now collectively own $37 billion less than they did in December 2012, when holdings reached an all-time high of $1.887 trillion, Fed data compiled by Bloomberg show.

At the same time, consumer lending at U.S. lenders excluding mortgages slowed to a 19-month low in February, while bank deposits exceeded loans by a record $2.49 trillion this month, according to data compiled by Bloomberg.

One reason has been a lack of consistent jobs growth, which had made American households more reluctant to spend.

The U.S. economy added fewer jobs on average in the first three months of 2014 than in the same period in the prior two years, data compiled by Bloomberg show.

Fed Chair Janet Yellen highlighted those inconsistencies March 31 at a conference in Chicago saying the recovery from the financial crisis “still feels like a recession to many Americans” whose spending makes up 70 percent of the economy.

‘Not Robust’

“The economy continues to operate in low gear,” Baker Group’s Caughron said in a telephone interview from Oklahoma City on April 23. Lending “is still not robust.”

The housing recovery in the U.S. is also showing signs of running out of steam, which may constrain mortgage demand.

Sales of new homes dropped 14.5 percent to a 384,000 annualized pace, less than any forecast of economists surveyed by Bloomberg and the weakest since July, a government report showed last week. Three of four U.S. regions had setbacks, with demand in the West falling to a more than two-year low.

The rate for an average 30-year mortgage has surged about a percentage point in the past year to 4.33 percent, making properties less affordable to first-time buyers. The drop in sales was concentrated in homes priced below $300,000.

The odds are still in favor of the U.S. economy gaining strength as the year progresses, which may ignite the kind of demand that prompts banks to put more money to work making loans instead of holding Treasuries, according to Carl Riccadonna, senior U.S. economist at Deutsche Bank AG, one of the 22 dealers obligated to bid at U.S. debt auctions.

Growth Forecast

The world’s largest economy, which expanded 1.9 percent in 2013, will grow 2.7 percent this year before accelerating 3 percent next year, based on 78 forecasts in a Bloomberg survey. The projection for 2015 would mark the fastest pace in a decade.

Orders for durable goods meant to last at least three years increased 2.6 percent in March, the most since November, while consumer confidence rose to a nine-month high this month, economic indicators showed last week.

“As we’re facing a stronger economy, then banks have to get back to doing what makes money for them, which is not hunkering down and hoarding cash in the vault but rather extending credit to businesses and households,” Deutsche Bank’s Riccadonna said. The Frankfurt-based firm forecasts that yields (USGG10YR) on 10-year Treasuries will rise to 4 percent by year-end.

Regulations that will impose stricter capital rules are prompting banks to buy more government debt and fuel demand for Treasuries regardless of whether loan growth increases.

Regulatory Shift

Set by the Bank for International Settlements in Basel, Switzerland, the rules require institutions to hold more top-graded debt as a cushion against potential losses to ensure that they can survive a crisis like the one that devastated the financial industry in 2008.

One such rule, known as the liquidity coverage ratio, would require that the biggest U.S. banks hold enough easy-to-sell assets such as cash and Treasuries to cover 30 days of stress. Among debt securities, only Treasuries and U.S. agency debt have been given full credit for the ratio, according to Fed guidelines released in October.

Bruce Thompson, Bank of America’s chief financial officer, said in a conference call on April 16 that the Charlotte, North Carolina-based firm “directed more of the investment portfolio to shorter-dated Treasuries and mortgage-backed securities” to meet that requirement.

“There are tougher liquidity rules that are being put into effect,” Paul Miller, a banking analyst at FBR Capital Markets Corp., said in an interview April 24 from Arlington, Virginia. “These are safe, riskless bets.”

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Michael Tsang


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Companies Mentioned

  • BAC
    (Bank of America Corp)
    • $17.04 USD
    • 0.27
    • 1.58%
  • C
    (Citigroup Inc)
    • $53.66 USD
    • 1.27
    • 2.37%
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