Banks Buy Treasuries at Seven Times 2011 Pace

by 12 Mar 2012
[caption id="attachment_6363" align="alignleft" width="275" caption="Federal Reserve Board Chairman Ben Bernanke"]LO Comp, loan officer, compensation, mortgage, rules, regulations[/caption] (Bloomberg) -- U.S. banks bought more government and related debt in the first two months of 2012 than they did in all of last year, an endorsement of Federal Reserve Chairman Ben S. Bernanke’s assessment of the economy that’s boosting demand for bonds even with yields near the lowest on record. Commercial lenders purchased $78.2 billion of Treasuries and securities of agencies in January and February, compared with $62.6 billion in all of 2011, bringing their holdings to $1.78 trillion, Fed data show. Deposits exceeded loans by a record $1.63 trillion last month, up from $1.17 trillion in January 2011, providing scope to buy more bonds. While the economy has expanded for eight straight quarters, unemployment at 8.3 percent, the scheduled end of the Bush-era tax cuts, a mandatory $1 trillion in federal budget cuts over 10 years and the presidential election campaign have made banks hesitant to accelerate lending. Instead of providing credit, they are exploiting the gap between the Fed’s target interest rate for overnight loans and Treasury yields to make profits. “Bank managers are still very cautious, and that’s appropriate,” Jeffrey Caughron, a partner at Baker Group LP in Oklahoma City who advises community banks on investments of more than $30 billion, said in a March 6 telephone interview. “We don’t expect negative growth or a recession, but we expect sluggish growth. There’s not the kind of loan demand that banks are used to having, so banks have excess liquidity and the place to go is the bond market.” Caughron advises clients to invest in government and municipal bonds.   Read full story from Bloomberg

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