What do America’s banks know about the state of the U.S. economy that has them hoarding ultra-safe bonds?
Growth is on a tear, hiring is the strongest in decades and households are the most upbeat since 2011. Yet banks such as Bank of America Corp. keep plowing their burgeoning deposits into U.S. government and related debt — pushing the industry’s holdings past $2 trillion — instead of lending it all out.
Part of the buildup has to do with rules that require banks to hold more high-quality assets in the wake of the worst financial crisis since the Great Depression. But it also reflects that borrowers, particularly among Americans scarred by the housing bust, are still repairing their finances rather than going into debt to splurge on big-ticket items. And that may mean the U.S. recovery isn’t quite as robust as all the upbeat data would suggest.
“Banks have so much cash,” said Peter Tchir, the New York-based head of macro strategy at Brean Capital. “Lending has loosened, but it is still just simpler for banks to own Treasuries.”
While the buying may help to contain any jump in Treasury yields as the Federal Reserve moves toward raising interest rates, what it says about loan demand also has implications for how soon benchmark borrowing costs will rise this year. Minutes from the Fed’s January meeting released last week said than many policy makers were in favor of keeping rates lower for longer to avoid jeopardizing the recovery.
Yields on five-year U.S. notes, which dropped as low as 1.15% last month, have since climbed as job and wage gains boosted the outlook for U.S. growth. The yield was 1.59% as of 7:39 a.m. in New York.
Investing in government bonds is proving to be a profitable move for banks. They’re making over a 100 basis-point spread by purchasing five-year Treasuries as opposed to leaving idle cash parked at the Fed where they earn only 25 basis points. U.S. commercial banks held $2.83 trillion in cash as of Feb. 11, up from $2.57 trillion at the end of last year.
Having cash invested in five-year Treasuries is also netting banks an attractive spread over what they are paying depositors. The gap between the spread of the government yield over the average deposit rate for the four largest U.S. banks is above its norm over the past decade. For Bank of America that gap is about 1.44 percentage points, according to data compiled by Bloomberg.
U.S. commercial banks have increased their stakes in Treasuries and debt from federal agencies for 16 straight months, the longest stretch since 2003, data compiled by Bloomberg show. Together, they hold $2.1 trillion, the most according to Fed data going back to 1973.
The four biggest U.S. banks more than doubled holdings of Treasuries to $251.8 billion last year, according to CompleteBankData.com, which analyzes data compiled from the Fed and Federal Deposit Insurance Corp.
Bank of America, the second-biggest U.S. lender, boosted investments almost 10-fold to $67.25 billion. Citigroup Inc.’s holdings rose by 60% to $110.38 billion, CompleteBankData.com figures show.
At the same time, lending hasn’t kept pace. One of the biggest reasons is a lack of consumer demand for borrowing. While loans to businesses at U.S. commercial banks have risen 13% to $1.81 trillion, consumer loans increased just 5% to $1.2 trillion.
At Bank of America, consumer lending has contracted for four straight years, the longest slump since at least the mid-1990s, data compiled by Bloomberg show. JPMorgan Chase & Co. has seen its consumer loans decrease in four of the past six years, while Wells Fargo & Co. reported an increase of less than 1% last year.
“Deposit growth has been very strong at Wells Fargo, and has outpaced loan growth and loan demand,” said Mary Eshet, a spokeswoman. “This has resulted in a great deal of liquidity on our balance sheet.” Spokesmen Jerome Dubrowski of Bank of America, Mark Costiglio at Citigroup and Andrew Gray of JPMorgan had no comment regarding the level of the banks’ debt or lending.
Senior loan officers in a Fed survey last month said demand for a broad range of consumer lending, from mortgages to auto loans, weakened even as credit standards eased.
Instead, U.S. households have been stockpiling cash. Since falling to a record low in 2005, savings as a percentage of income has more than doubled to 4.9% as of December.
“Everyone still wants the bigger TV, the better car, but I don’t think they’re willing to leverage themselves nearly as much,” said Jeffrey Klingelhofer, a Santa Fe, New Mexico-based money manager at Thornburg Investment Management, which oversees $89 billion.
Fed officials are counting on the extraordinary measures taken since the financial crisis to revive growth and consumer demand. Record low borrowing costs have helped to spur job growth and the economy has added about 250,000 jobs per month over the past year.
“You’re going to have more consumer demand for borrowing,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, an institutional brokerage. “It’s just a matter of time before banks become more relaxed in their policies and their willingness to lend.”
While traders have reduced expectations for a June rate increase, futures show more than a 50% probability that the Fed tightens by the end of the year. Yields on all Treasuries are forecast to rise in 2015.
Helping to keep a lid on yields has been guidelines requiring financial institutions to own the highest-quality assets while trimming risk-taking activities.
“The regulatory environment has driven banks to buy more Treasuries,” said Jeff Caughron, chief operating officer in Oklahoma City at Baker Group LP, which advises community banks with more than $45 billion in investments.
Basel III rules and requirements approved by the Fed, Office of the Comptroller of the Currency and FDIC, require banks to hold enough high-quality liquid assets to survive a 30-day credit seizure, in order to minimize a sudden shock to the global financial system.
“It’s liquidity. It’s convenience. What happens if deposits do dry up?” said Thomas Graff, who manages $3.6 billion of fixed-income assets at Brown Advisory Inc. in Baltimore. “All those concerns are there.”
– To contact the reporters on this story: Liz Capo McCormick in New York at firstname.lastname@example.org; Daniel Kruger in New York at email@example.com To contact the editors responsible for this story: Dave Liedtka at firstname.lastname@example.org Michael Tsang
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