Supporting the ongoing strength in Treasury bonds, along with related exchange traded funds, American banks have been hoarding U.S. government debt for the past 12 straight months.
U.S. Treasury bond ETFs have been among the better performing assets this year, with the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) up 6.5% and iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) 18.2% higher.
Putting more pressure on Treasury yields, commercial lenders have increased their Treasuries positions in September by $54 billion to a record $1.99 trillion, reports Susanne Walker for Bloomberg.
Bond prices and yields have an inverse relationship. Fixed-income assets strengthened as benchmark yields on 10-year Treasuries dipped from around 3.0% at the start of the year to around 2.42%.
Despite a slight pullback in U.S. government debt securities last month due to concerns over interest rate expectations, Banks’ holdings of Treasury bonds touched their highest since 2010.
Banks are piling into U.S. government debt as loan growth fails to keep pace with record deposits. Additionally, new regulatory rules that take effect in January require banks to hold more high-quality assets.
“There’s extra cash the banks have to put to work,” George Goncalves, the head of interest-rate strategy at Nomura Holdings Inc., said in the article. “It’s not being fully utilized because of less demand, but also the banks have to be much safer,” which is why they’re buying Treasuries.
Nevertheless, some market observers warn that banks could shift away from government bonds next year to boost lending. Consequently, Treasuries won’t find continued support from commercial banks next year.
“We expect the banks are going to see stronger loan growth, so more of their liquidity will be going into those types of earning assets,” Matthew Burnell, a senior banking analyst at Wells Fargo & Co., said in the article.
iShares 7-10 Year Treasury Bond ETF
For more information on the Treasuries market, visit our Treasury bonds category.
Max Chen contributed to this article.