(Bloomberg News) U.S. banks are buying U.S. government securities at the fastest pace in nine months as lenders retreat to the safety of Treasuries with the economy expanding slower than forecast and loan demand dormant.

Commercial banks bought $65 billion of U.S. debt in the past seven weeks, as their total holdings reached $1.68 trillion, Federal Reserve data show. The purchases were the most since $79.1 billion in the period ended July 21, just before the recovery began to falter and Fed Chairman Ben S. Bernanke signaled policy makers would conduct a second round of bond purchases to spur growth.

Economists from JPMorgan Chase & Co., the second-largest U.S. bank by assets, to Credit Suisse Group AG, the No. 2 Swiss lender, are lowering growth forecasts as rising fuel prices cut disposable income and housing prices continue to fall. Bonds are helping bolster earnings as the Fed keeps its target interest- rate for overnight loans between banks at a record low.

"The idea that we're going to see anything remotely approximating robust growth is quickly fading," said Jeffrey Caughron, a partner at Baker Group LP in Oklahoma City who advises community banks on investments of more than $30 billion. "They simply don't have the loan demand, or good loan demand. They have to keep their money working for them, so there's no place else to go but the bond market."

Drop In Loans

Debt analysts at New York-based JPMorgan said in an April 29 report that total loans at the 30 banks they cover, including Bank of America Corp. and Citigroup Inc., fell by 1.08%, or $46.7 billion, in the first quarter to $4.29 trillion. They increased 0.14% in the final three months of last year.

Loans fell even though assets increased by 1.47%, or $146.6 billion, to $10.1 trillion, according to the JPMorgan analysts. While Fed data show banks are carrying 3.5% more commercial and industrial loans on their books now than in September, or $1.25 trillion, that's still 23% below the peak reached in October 2008 of $1.62 trillion.

Banks' U.S. government debt purchases are helping to support demand for the record amount debt the Obama administration is selling to finance the $1.4 trillion budget deficit as the Fed winds down its $600 billion bond-purchase program known as quantitative easing in June.

Treasuries returned 1.15% on average in April, including reinvested interest, the most since they gained 2.05% in August, according to Bank of America Merrill Lynch's U.S. Treasury Master index.

Bond Rally