Bloomberg.com: “U.S. banks are buying Treasuries at the fastest pace since just after the last recession, helping shore up demand now that the Federal Reserve has finished purchasing $300 billion worth to hold down borrowing costs.
Even after banks including Bank of America (NYSE: BAC) and Capital One Financial Corp. increased such investments 26 percent to $125 billion in the 12 months through June, they have only about 1 percent of their assets in Treasuries, Fed data show. That’s down from the 8.5 percent average for the year after the past five recessions. Banks would have to buy $1 trillion more to reach past levels, so demand “could remain quite high for some time,” Barclays Plc said.
Banks including JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C) and Wells Fargo (NYSE: WFC) are recapitalizing an industry that remains hesitant to take risks as joblessness approaches 10 percent. They’re profiting from a steepening yield curve, buying longer- term Treasuries with money acquired at short-term rates kept low by the Fed’s near-zero benchmark.
That may temper yield increases amid record sums of new U.S. debt, keeping borrowing costs down even as banks lend out the smallest portion of their deposits in 15 years.
“Banks will continue to purchase Treasuries for the next several quarters, at least until the end of 2010, as they continue to be reasonably risk averse,” said Ira Jersey, an interest-rate strategist in New York at RBC Capital Markets, which trades with the Fed as a primary government-debt dealer”.
My comment: This is just a stealth monetization that temporarily benefits both the banks and the Treasury. The banks can go to the Federal Reserve and get money for a zero interest rate and then buy Treasury securities at 3%, lever up five to six times and get a risk free 15-20% return. The Treasury likes this because it helps to get rid of the mountain of debt they have to sell. The banks like it because they make free profits and they also reliquify their crummy balance sheets. This game can go on as long as interest rates do not go up. At some point inflation will take hold or the dollar will accelerate its decline and interest rates will have to be raised. Then the whole thing comes unwound as the banks are not going to hold US Treasury bonds if rates are going up as the value of the bonds will decrease. This is the race that is on, can the banks get well off this free carry trade before the FED is forced to raise rates? This whole scheme has disaster written all over it as bubbles are forming again in commodities and emerging markets. As usual it is all about timing.