"Bank earnings are not good," said Hideo Shimomura, who helps oversee the equivalent of $73.2 billion in Tokyo as chief fund investor at Mitsubishi UFJ Asset Management Co., a unit of Japan's biggest lender. "They cannot take much risk. It's supportive for Treasuries."
Banks can profit by borrowing money from the Fed at almost nothing and investing in Treasuries, profiting from the near record gap between short- and long-term rates.
Record Gap
Ten-year Treasuries have yielded an average of 2.89 percentage points more than the Fed's target federal funds rate since Lehman Brothers Holdings Inc. collapsed in September 2008. In the decade before that, the difference averaged 1.15 percentage points.
Lenders have raised U.S. government bond holdings 4.3% since March 2, after keeping them unchanged in the first nine weeks of the year. Banks increased Treasuries by more than 12% annually in each of the past three years as they sought less risky assets following the collapse of global credit markets.
"Banks are getting some leading indicators from their own loan growth," Amitabh Arora, an interest-rate strategist in New York at Citigroup. "There continues to be a decline in consumer loans" including mortgages and credit cards, he said.
Few Alternatives
Banks have few alternatives to Treasuries as sluggish home sales reduce the amount of AAA-rated mortgage-related debt sold by government-chartered agencies Fannie Mae and Freddie Mac.
Offerings of bonds backed by consumer loans have fallen to $35 billion this year from $127 billion in all of 2010 and $184 billion in 2009, according to Bloomberg data. The U.S. savings rate has risen to 5.5% from 1.2% in 2005, according to government data.
The Fed said last month that consumer borrowing totaled $7.62 billion in February, compared with the peak of $17.3 billion in August 2007. Total bank assets have grown about 17.6% over that time to $12.2 trillion.