Banks Are Crashing On Bonds, But Not Because They Want To

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NS economy is growing. Businesses hiring. Stocks rising. And banks are sitting on huge piles of cash.

I wish there was a better place to put it.

remainder supply chain issues concerns about the potential Delta variant The coronavirus’s resurgence of the economy has reduced the borrowing of businesses. and consumers flush with cash The government is not borrowing too much, either, thanks to its incentive efforts.

So banks are largely left to invest in one of the least lucrative assets around: government debt.

Odds Treasury bills still close to historical lows, but banks are buying more government debt than ever before. In the second quarter of 2021, banks purchased nearly $150 billion in Treasurys, according to a memo released this month by JPMorgan analysts.

Analysts say it’s a strategy that’s almost guaranteed to generate stingy profits, and banks aren’t thrilled to do it. But they have very few options.

“Widget companies are making widgets and banks are lending,” said Jason Goldberg, a bank analyst at Barclays in New York. “That’s what they do. That’s what they want to do.”

By putting their customers’ deposits into investments such as loans or securities such as Treasury bills, banks earn the money needed to pay interest on those deposits and make a profit. As the economy grows – like now – as consumers make large purchases and businesses expand, banks usually have no problem finding borrowers. These loans often yield better returns than Treasury bonds, which are reserved for times of uncertainty, as banks will accept lower rates of return rather than a risky loan.

When the pandemic hit, borrowing briefly increased as companies used their lines of credit. However, just as banks have a lot of money to lend, the now booming economy is not generating demand for credit.

Businesses either already have enough cash, have other ways to raise money, or see little reason to engage in risky expansion amid the still smoldering pandemic. And consumers are not only avoiding new loans, but paying off old loans as well, thanks to the trillions of dollars the federal government has spent to cushion the financial blow of the pandemic.

“It was this economic expansion that came from a significant contraction,” said Bain Rumohr, an analyst at credit rating agency Fitch, which covers North American banks. “And what would typically have been, yes, increased demand on the corporate side and on the consumer side. And that hasn’t shown up yet.”

The lackluster demand for credit reflects the government’s success in protecting companies and households from destruction during the pandemic.

Between the two presidential administrations, the federal government launched a massive borrowing and spending program to help small businesses, large corporations, and households weather the worst of the shock. Between March 2020 and May 2021, Congress has allocated approximately $4.7 trillion to such programs through the enactment of six Covid-19 relief legislation signed by President Donald J. Trump and President Biden.

Most of this money flowed into the bank accounts of American households and companies. By the end of May, approximately $830 billion in incentive check payments had been sent to individuals. An additional $800 billion was sent to businesses in the form of programs such as Salary Protection Program. And according to the data, approximately $570 billion was spent on expanded and improved unemployment insurance benefits. From the Government Accountability Office.

It worked. While the downturn is steep, the coronavirus recession is the shortest on record. lasting only two monthsand the economy has already more than made up for its losses.

But for the banks, this flood of government payments was a mixed blessing.

Undoubtedly, it prevented them from taking losses on loans to individuals and companies that would otherwise go into default. But it also provided much healthier bank account balances for both corporate and consumer America. Deposits in the commercial banking system have increased by nearly 30 percent since pre-pandemic to nearly $17.3 trillion.

To make money, banks need to reinvest stagnant dollars, but that seems difficult. Not only do companies and households have ample cash of their own, but their willingness to borrow weakens as the Delta variant complicates reopening plans.

Uncertainty about the reopening of offices seems to be slowing demand for loans from commercial real estate developers, which is normally a lucrative source of credit. Other reliable sources of borrowing have also slowed: Auto dealers that take out loans to keep their stocks in stock aren’t borrowing much because supply chain bottlenecks outweigh. automobile production.

Banks have acknowledged their struggle to find attractive ways to distribute their deposits.

Shares of Bank of America stumbled last month after reporting gains that disappointed investors, in part due to a slower-than-expected recovery in loan balances. When asked about a profitable area where loan balances fell — the high-interest credit card balances people don’t pay off each month — Brian Moynihan, CEO of Bank of America, simply explained the decline.

“They just have more cash,” he said. “And so they paid off their credit cards, which is something they are fully responsible for.”

It was a common refrain. Wells Fargo experienced a decline in business loans in the second quarter and said its customers “continue to have a high level of cash on hand.”

Michael Santomassimo, head of finance at Wells Fargo, told analysts that there are “green shoots” in some sectors, but that overall “demand has not recovered yet”.

M&T Bank, a Buffalo-based lender focused on the Northeast and Mid-Atlantic States, had fewer loans on its books at the end of the quarter as the bank struggled to find profitable places to put money.

“Customer deposits are at all-time highs and have grown faster than our ability to place them in assets,” Darren J. King, the bank’s chief financial officer, told analysts.

And so banks turned to government bonds, where interest rates had been low for more than a decade. When the yield on the 10-year Treasury bond briefly rose to 1.75 percent in March and April, higher yield-hungry banks rushed to buy them – a mess that helps explain why the rise in interest rates didn’t last.

Bond yields move in the opposite direction of bond prices and banks will continue to buy bonds unless they have better alternatives. And that may help limit odds for a while.

“That’s one of the things that keeps rates low,” said Gennadiy Goldberg, senior analyst who covers the government bond market at TD Securities in New York.

The dynamics are unlikely to change until companies and entrepreneurs have a better sense of certainty about future economic conditions, something the Delta variant currently hinders by making it harder to predict the flow of goods to manufacturers and the flow of workers back to work.

Barclays analyst Mr Goldberg said companies are definitely looking to invest more. “But given the supply chain constraints and the difficulty of finding skilled workers, I think, they have been slow to put that money to work.”

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