US banks are snapping up Treasuries at the fastest clip since the peak of pandemic-sparked worry swept markets in 2020
US banks are snapping up Treasuries at the fastest clip since the peak of pandemic-sparked worry swept markets in 2020, per Bloomberg.
During the two-week period ending on March 13, commercial banks acquired $103 billion of Treasuries and non-mortgage debt from federal agencies, as reported by the Federal Reserve's weekly holdings data. This category is used by analysts to assess demand for Treasury securities. According to RBC, this increase marked the largest two-week percentage gain since June 2020.
Blake Gwinn, head of US interest-rate strategy at RBC Capital Markets, suggested that with deposit balances still high, loan growth slowing, and the possibility of an approaching Fed rate cut cycle, it is logical for banks to start adding higher-yielding US Treasuries to their asset portfolios. However, due to the magnitude of the two-week increase, RBC analysts suspect that there might be some other factor at play, though they are unsure what that might be.
Fed Chair Jerome Powell's recent message following the policymakers' meeting was that it could be appropriate to lower rates later this year if inflationary pressures continue to ease.
Despite the significant increase in bank buying of Treasuries, Gwinn noted that the market reaction suggests that banks are likely purchasing short-duration Treasuries. He anticipates that bank demand for Treasuries will continue in the medium and long term.
The data indicated that the majority of the bank buying was done by the largest US financial institutions.
TD Securities strategists recently linked the increased bank demand to Fed comments supporting a slowdown in the central bank's reduction of securities from its balance sheet through its quantitative tightening program.
Dallas Fed President Lorie Logan suggested in early January that policymakers should consider when and how to begin tapering the QT program by reinvesting larger sums. Fed Governor Christopher Waller also discussed this topic in a March 1 speech, indicating a preference for an increase in short-term Treasuries in the central bank's holdings.
Gwinn of RBC, however, believes that significant increases in US Treasury duration by banks are more likely to occur gradually over an extended period rather than in a sudden two-week spike.