AS THE FED "TIGHTENS" THE LARGEST US BANKS STOCKPILE TREASURIES: WHAT DO THEY KNOW THAT YOU DON"T KNOW?

American Banks Pile Up Treasuries as Deposits Surpass Loans (4)
2014-10-06 16:00:00.469 GMT


(Updates 10-year yield in fifth paragraph.)

By Susanne Walker
Oct. 6 (Bloomberg) -- American banks are loading up on U.S.
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 $54 billion to an
unprecedented $1.99 trillion, data from the Federal Reserve
show. Banks have now been net buyers for 12 straight months.
Bank of America Corp. 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 high-quality
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 U.S. 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 Sept. 29. “It’s not being
fully utilized 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 U.S. government bonds
has helped Treasuries gain 4.2 percent this year and pushed down
yields on the benchmark 10-year note by more than half a
percentage point to 2.42 percent as of 11:55 a.m. in New York.

Deposit Overflow

Banks’ holdings of U.S. 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 percent
decline was the biggest monthly loss of 2014.
Futures traders are now pricing in a 52 percent 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 added almost $180 billion this year,
data compiled by Bloomberg show. Banks have stepped up their
bond purchases as deposits have ballooned to $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 $300 billion in the past year.
Bank of America, the second-biggest U.S. bank, has more
than quadrupled its available-for-sale holdings of Treasuries
and federal agency debt this year to $38.7 billion as of June
30, the latest company filings compiled by Bloomberg show.