US major banks amass cash by rejecting US Treasuries in light of taper risk
Bloomberg noted in its report that US debt holdings by some of the nation's big banks had dropped significantly. After posting a record high of USD1.89 trillion in 2012, lenders including Citigroup Inc, Bank of America Corp and Wells Fargo & Co were seen reducing their holdings in US debt, which resulted to obtaining large amounts of cash.
The report said the USD1.8 trillion of US bonds by banks in 2012 had reduced its cash value to more than 30%, which was the least since the US Federal Reserve had collected data since 1973. Banks were said to be preparing for the emergence of loans due to the economy regaining its strength, which was said to be a factor on the Fed's decision to taper its bond purchases. Moreover, the cheap-money policies implemented in the last five years had led to the depression of yields, ergo making Treasuries less attractive purchases for banks to earn additional income.
Banks' holdings in federal agency bonds and Treasuries decreased over USD80 billion this year, data compiled by The Fed revealed, indicating its first yearly decrease since 2007. Moreover, cash on hand by banks climbed by a record USD882 billion this 2013 to USD2.59 trillion, which was said to be an all-time high.
Thornburg Investment Management Inc money manager Jeffrey Klingelhofer said, "Banks reluctant to lend were large holders of Treasuries. Like a lot of other people who have been moving out of fixed income, it's largely to avoid the fallout from tapering."
Treasuries, which had generated banks 30% in returns in the past five years, had dipped 2.33% this year. The Bank of America Merrill Lynch U.S. Treasury Index experienced a 0.43% decline last month, which led to reducing a two-month gain on the said securities.
FTN Financial interest-rate strategist Jim Vogel said over the phone, "There's more productive uses (for cash than investing in Treasuries. The need for banks to hold) Treasuries on their balance sheet is pretty small."