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Since June, Banks Have Bought $83 Billion In Government And Agency Bonds
It is good to know banks are doing something with that $1 trillion + in excess reserves. And yes, "reinvestment" is technically considered doing something. David Rosenberg explains that since American citizens are now broadly considered unworthy of crediting (and since those same consumers would rather have a steady income and/or a job before taking out a loan), banks are now merely riding on the increasingly flattening treasury wave.
From Breakfast with Dave:
BANKS LENDING ALL RIGHT ... TO UNCLE SAM!
The banks are still sitting on an unprecedented cash hoard and doing nothing with it. Consider that on a 13-week rate change of basis:
- C&I loans are down at a 1.2% annual rate.
- Home equity lines of credit are down at a 4.1% annual rate.
- Residential mortgages are down at a 2.9% annual rate.
- Commercial real estate loans are down at a 9.2% annual rate.
- Credit card loan balances are down at a 6.7% annual rate.
Meanwhile, cash on bank balance sheets have expanded at a 10% annual rate over this time frame and purchases of government securities have ballooned at a 21.3% annual rate. In fact, since the end of June, the banks have bought a huge $83 billion of government/agency bonds, the third most over such a short time frame. Just in case you were wondering who has been the culprit behind this phenomenal rally in the Treasury market.
So far this year, the total return on bonds has exceeded equity market returns by about 19 percentage points. The last three times this happened was in 2001, 2002 and 2008. Something is brewing here. All we can say is that when we look at the Commitment of Traders report, we see that for the first time since October 6, 2009, the speculators have moved to a net long position on the 10-year Treasury note — still very small at 34,404 contracts (the peak net short position was back on April 13 — around the time of the Grant’s Conference — at 269,879 net shorts). The nearby peak in the net speculative longs back in 2007 (August 7, just as the credit cycle was beginning to turn) were 668,018 contracts. So there is still a lot of potential buying here by the non-commercial players. As for the long Treasury bond, there is still a net short position left to be squeezed — 13,100 contracts (though off the March high of 120,784) and think of how much of a bull flattener we could see if these positions ever swung back to the peal 62,448 net longs prevailing at the peak of three years ago.
Full Rosie note.
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Bingo!!!
Treasuries, bitchez!!
I mean banks, no, I mean bank bitchez!!!!
Heyyyyyy Treasuries Bitches is my line :)
The Fed carry trade is the ultimate carry trade. (Whenever I hear that term I think "organized crime syndicate".)
And they will buy much, much more in the coming months.
Ben Shalom: Timmay, you got Lloyd's piece. Lloyd, you got my stick. Jamie, I got your love muscle and you got Timmay's. Alright ... 3 ... 2 ... 1 ... JERK!
Exactly... The banks are borrowing money from the Fed against crap MBSs at the discount window so they can buy treasuries and agencies to support the government deficits caused by bailing out the same crap MBSs the Fed is accepting as collateral. Meantime, the Fed is also buying these bonds so the banks don't take a hit to their balance sheets so the giant circle-jerk can continue.
Yes, this is productive use of capital.
In the midst of the run on the banks in 2008, arrangements like this actually made sense, where the government would give banks boatloads of "cash" to repel the sharks, which the banks could then lend back to the government at zero interest. Nice, tidy way of the banks hiding in the Federal government's skirts.
At the time, I worried about the exit strategy. I actually asked a former Fed governor about it back in late 2008 in a public forum, and she said something vaguely along the lines of "Oh, I'm sure they've thought about that and will do the appropriate thing etc. etc."
Fast-forward 2 years and both markets and the feds have grown addicted to cheap fake money, as I feared then. Ending TALF and curtailing direct MBS purchase was a start, but given the way the economy and markets have responded (or haven't), I'm afraid that's about all we're going to see of normalization for a while.
As the fundamentals for the economy continue to deteriorate and global solvency fears spread can we assume that these purchases will increase even as the yield goes lower?
Does not sound conducive for economic growth to me and how about when the sovereign nations start throwing their cash in U.S. bonds for protection.
I think they are hoarding cash because they know eventually the losses will rear their ugly heads.
Cash up $83B, but how much did their not-disclosed non-performing loans increase?
Shades of Argentina, where the banks wound up buying a lot of gov't debt when foreign and other domestic appetite started drying up. If these trends continues (foreign capital outflows, banks becoming the visible buying of last resort), it does not bode well. When the Fed resume QE, even when it is "lite", and no real debate and action on how to solve our pre-recession structural budget issues appears to be happening, is it any wonder foreigners are losing confidence in the long-term course of the USS America?
Hrmmmm, banks owning treasury debt rather than CDS and Mortgage debt..... truly a horrible thing, to achieve yields they place the money in treasury bonds and have cushions when the market crashes and the dummy traders stayed short.
Where are all the observations on how stupid and crazy I was from 9 months ago? Like I keep telling you people, do your own fucking homework :) Perhaps China wasn't the "Stealth Buyer of Treasuries" such as was pontificated on this forum, perhaps it was the private banks like I frakkin told everyone. Yeah, this is tootin my own horn, but hey, I will admit I was completely wrong about an equity crash (at least in the time frame we've experienced, but then again timing is everything in the market).
I will continue to say, do your own homework and don't listen to every two bit economist out there.
You're crazy-stupid, phaesed.
And I mean that in a very good way. :)
It's certainly consistent with the general deleveraging meme. More people are parking more cash in banks... and banks have very few possible things to do with that money given they can't loan it back out... specifically, treasuries are one of the few... given the mbs genie is out of the bottle.
How is this not a back door monetization of the debt?
It's not monetization if it's zero sum: If you issue debt but then give banks the money to buy it, all you're doing is increasing leverage.
This is what I love about our economy. The folks "formerly known as Bankers" have the financial sophistication of Hitler invading Russia. "So long as the government wants it we will make it so." AWESOME because it is so manifestly incompetent. In short "it's the greatest momentum trade in history." That's why I'm calling for MORE government spending, not less--and a "Don't vote humans" campaign come November. VOTE MONKEY! The only downside of Primate Democracy is that even with RANDOMNESS it still might continue to function.
So, as I see it, some quick data points of reality.
China is dumping its US Trasherys at about 2-3% per month for the last 3 months based on TIC data. It is now down almost 10% from its historic high holdings a year ago. They are pumping fear, and dumping US Trash.
FED is now going to monatize US Trash @ about a 50% rate to Chinese sales, to start. This will increase as time continues forward due to MBS refi funds increasing. So banks front run the FED, to load up on inventory to sell back.
FED sub banks now are buying 100% of Chinese sales, per month and warehousing it at the FED via their cash on deposit funds. Japan is a buying up US TRash also, but this is to help dilution their currency apprecation.
Billy Gross is probably printing funds as the offical FED Front Runner.
FED is digesting its MBS meal, like a pig in a python, by stimulating the refi market with historic lows. This gets the funds off the balance sheet, and US Trash on it.
Meanwhile, the US has two wars and two cold war naval carrier deployments bothering our eastern non friends. A wing of Raptors is training the Pacific... Three of the uber cruise missle subs are floating around off of known obvious locations as of a few weeks ago.
Russia is sending its fuel load to Iran any day now...
Kind of makes ya think, something could happen... Sooner rather than later.
Yes: Something could happen. A new iPad could come out any minute now. Are you ready for it?
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