US banks hold 2 trillion USD in low-risk bonds

Noam Stiekema

The US economy growth is steady and strong during the last decades and the households are quite more optimistic since 2011, but the US trade banks are buying more low-risk bonds. The economists started wondering what additionally they know for the largest economy in the world. The US trade banks hold low-risk bonds for over […]

Bank of America

Bank of AmericaThe US economy growth is steady and strong during the last decades and the households are quite more optimistic since 2011, but the US trade banks are buying more low-risk bonds. The economists started wondering what additionally they know for the largest economy in the world. The US trade banks hold low-risk bonds for over 2 trillion USD, which is the highest level in the history of the world economy. The banks continue to increase their investments in government and corporate bonds instead of borrowing money to the households and business companies in the form of loans.

One of the reasons for the growth of the US debt investment might be in the rules that require banks to hold more high-quality assets. But this is due to the behavior of borrowers, who still remember the burst of the housing bubble, which still pay old debts rather than engage in new debt and to make huge purchases. This may mean that the recovery of the US economy may not be as strong as the optimistic data suggest. Although purchases can help to contain a possible spike in yields on government securities as the US Federal Reserve moves to increase interest rates, what is clear from the trends in demand for loans, is also relevant to how early borrowing costs will go up this year.

The requirements of Basel III and regulatory commitments for banks issued by the Fed and other US regulators force banks to hold sufficient high-quality liquid assets for a 30-day period to minimize the effects of a sudden shock to the global financial system. The yield on 5-year US bonds, which fell to 1.15% in January, rose after data on jobs and wages increased expectations for the US economy.

Investments in government securities proved a winning move for banks. They achieve a spread of over 100 basis points by buying 5-year government securities and deposit their spare cash at the Fed, where they can receive only 25 basis points. As of 11th February 2015 the US commercial banks have cash for 2.83 trillion USD, which is more than the end of 2014. Then in the vaults had 2.57 trillion USD. The investing in 5-year bonds held banks and attractive spread over what you pay on deposits. The difference between the yield spread on government bonds above the average deposit rate for the four largest US banks is above the normal level in the last decade. For Bank of America this difference is about 1.44 percentage points, show calculations by Bloomberg.

The US commercial banks increased their investments in government securities and debt securities issued by federal agencies for 16 consecutive months. This is the longest period of growth since 2003. All banks hold securities for a total of 2.1 trillion USd, this is the highest amount since 1973, since the Fed collects data. In 2014, the four largest banks doubled their investments in government securities to 251.8 billion USD, which analyzes the statistics published by the Federal Reserve and the Federal Agency for deposit insurance.

Bank of America, which is the second-largest US bank, increased its investment almost 10 times to 67.25 billion USD, while those of Citigroup Inc grow by 60% on year to 110.38 billion USD. Meanwhile the pace of lending is unequal. One of the main reasons for this is the lack of consumer demand. Although the business credits granted by commercial banks increased by 13% to 1.81 trillion USD, consumer loans are rising by only 5% to 1.2 trillion USD.

The consumer finance at Bank of America declined for four consecutive years. This is the longest period since the mid 90s. Demand for consumer loans to JPMorgan Chase & Co decreased in four of the last six years. Consumer lending at Wells Fargo & Co rose by 1% in 2014. Rather than seeking loans households save. Once dropped to a record low level in 2005, the ratio of savings to disposable household income doubled to 4.9 per cent as at December 2014.

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