The Ultimate Carry Trade: US Banks Buying Treasuries
marctomarket.com / by Marc Chandler / October 21, 2014
The drop in US bond yields is perhaps the biggest surprise for investors this year. The gradual decline in Federal Reserve buying, faster growth, and the prospects for a rate hike in 2015 were expected to lift bond yields. Who would buy US Treasuries when the largest buyer was pulling back, and yields would inevitably rise? Moreover, with China’s current account having been reduced, and reserve growth slowing (and went into reverse in Q3), and less reserve accumulation, foreign central banks’ demand was likely to soften. In fact, some central bank, like Russia, and a few other central banks, appeared to be liquidating some Treasury holdings to defend their currencies. Indeed, over the past four weeks, the Federal Reserve’s custody holdings of Treasuries for foreign central banks have fallen by $48.5 bln. Here we only address one source of persistent demand for US Treasuries: US banks. This Great Graphic from the St. Louis Fed shows the surge in commercial banks holdings of US Treasuries and Agencies, but excluding MBS since late last year. In 2013, banks mostly were sellers. For the past twelve months, US banks have consistently bought US government bonds and agencies. Over this period a little more than $145 bln have been purchased. Having easily established this bank demand for government paper, it is both more interesting and disturbing to think about their motivation. It is both an expression of, and an attempt to resolve a fundamental problem, which is ironically the exact opposite of what orthodox thinking tells us. The banks simply have too much money.
More posts from
