U.S. banks are hoarding Treasuries in response to new liquidity rules, bolstering Treasury bonds and related exchange traded funds.
Year-to-date, the iShares 3-7 Year Treasury Bond ETF (NYSEArca: IEI) rose 1.0%, iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) gained 3.4% and iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) increased 10.1%.
Commercial lenders like Bank of America Corp (NYSE: BAC) have increased their holdings of Treasury bonds every month this year and now hold $1.85 trillion in Treasuries, or within 2% of the record held at the end of 2012, reports Susanne Walker for Bloomberg.
Banks have been forced to take on more government debt as regulators push to limit exposure to risky assets. [Long-Term Bond ETFs Outpacing Equities]
“The economic situation is still not fully bared out and they have to do something with their cash,” Jeffery Elswick, director of fixed-income at Frost Investment Advisors, said in the article. “Banks have been big buyers of Treasuries. They need safe assets.”
Specifically, the Bank for International Settlements in Basel, Switzerland outlined new rules that require institutions to hold more top-graded debt to hedge against potential losses so that they can weather another financial crisis like the one witnessed in 2008. The so-called liquidity coverage ratio requires that the biggest U.S. banks hold enough easy-to-sell assets, like cash or Treasuries, to withstand 30 days of stress.
“There are tougher liquidity rules that are being put into effect,” Paul Miller, a banking analyst at FBR Capital Markets Corp., said in the article. “These are safe, riskless bets.”
Moreover, debt investors have picked up Treasuries this year as labor-markets remain relatively weak and consumer spending hovers below the Federal Reserve’s target. Escalating tensions between Russia and Ukraine have also bolstered demand for safe-haven assets like Treasuries.
The rising demand for Treasuries has helped push down yields, with benchmark 10-year Treasury yields down to 2.68% from a high of 3.05% in January. [Global Tensions, Faltering U.S. Stocks Boost Safe-Haven Treasury ETFs]
iShares 20+ Year Treasury Bond ETF
For more information on Treasuries, visit our Treasury bonds category.
Max Chen contributed to this article.