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.
Profitable Investment
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.
Doubling Holdings
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.
Deposit Growth
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.
