Lenders have added Treasuries to meet new reserve rules from the Dodd-Frank financial-overhaul law and Basel III regulations set by the Bank for International Settlements in Basel, Switzerland.
In 2011 banks bought $30.6 billion in government securities in the first half and $32 billion in the second half. Purchases in 2011 fell from $190 billion the year before. Bank of America, the second-biggest U.S. lender, cut its $49 billion holdings of Treasuries to about $43 billion at the end of last year, Jerome F. Dubrowski, a company spokesman, wrote in a March 8 e-mail.
While the unemployment rate remained steady for a second month at the lowest since February 2009, and the index of U.S. leading indicators rose 0.4% in January, its fourth straight increase, Bernanke said in testimony before Congress March 1 that economic conditions may warrant low interest rates at least through late 2014. The central bank has kept its benchmark rate about zero since December 2008.
Bernanke told the House Financial Services Committee on Feb. 29 that, while there have been “positive developments” in the labor market, it “remains far from normal.”
A month earlier, Bernanke said the Fed was considering another set of asset purchases to boost economic growth even after the central bank bought $2.3 trillion in bonds in two stages of so-called quantitative easing ending in June.
The central bank lowered its projected range for growth this year to a range of 2.2% to 2.7%, from 2.5% to 2.9% in November. The range for next year is 2.8% to 3.2%, down from a previous forecast of 3% to 3.5%. The median estimate of economists surveyed by Bloomberg News is for growth of 2.2%.
While those rates would be up from 1.7% in 2011, they’re below the average of 3.1% in 2004 through 2006, before the start of the biggest financial crisis since the Great Depression. In the past 60 years, the U.S. economy grew at an average annual rate of 3.2%.
A deficit reduction law passed last year that requires $1 trillion in discretionary spending cuts spread over 10 years would take effect in January 2013 if Congress and the administration can’t agree on an alternative plan.
The administration of President Barack Obama has called for $1.5 trillion in tax increases, in part by allowing tax cuts from the era of President George W. Bush to expire for families earning more than $250,000, as well as spending to boost jobs as part of his 2013 budget request. The four major Republican candidates said they would lower taxes and cut federal spending if elected.
“In the next eight or nine months, we face some headwinds,” David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut, said in a telephone interview March 6. “The real issue here is that there’s just not that much creation of credit.”
Loans Below Peak
Ader forecasts a 2.75% yield on the 10-year at year- end and a 1.5% GDP for this year.
While commercial and industrial loans at U.S. banks have risen to $1.38 trillion from $1.2 trillion in October 2010, they’re below the peak of $1.62 trillion reached in October 2008. Credit losses for U.S. lenders fell to $25.4 billion, the lowest in 15 quarters, the FDIC said Feb. 28.
Banks had $1.58 trillion in cash as of Feb. 29, according to data compiled by Bloomberg. While down from a record $1.9 trillion in July, the amount was $287 billion in 2007.
“With the elections coming up, loan demand will stay weak and banks will continue to buy the securities and keep rates low,” Priya Misra, head of U.S. rates strategy in New York at Bank of America, one of the 21 primary dealers of U.S. government securities that trade with the Fed, said in a March 5 telephone interview. “Banks are not voluntarily buying these Treasuries. They just don’t have enough loan demand.”