Banks Bail
Over the past decade, when one or two key buyers of Treasuries has seemingly backed away, others have been there to pick up the slack.
That’s not what’s occurring this go around, according to JPMorgan Chase & Co. strategist Jay Barry.
Demand from US commercial banks has dissipated as Fed policy tightening drains reserves out of the financial system. In the second quarter, banks purchased the least amount of Treasuries since the final three months of 2020, Barry wrote in a report last month.
“The drop in bank demand has been stunning,” he noted. “As deposit growth has slowed sharply, this has reduced bank demand for Treasuries, particularly as the duration of their assets have extended sharply this year.”
It all adds up to a bearish undertone for rates, Barry added.
The Bloomberg US Treasury Total Return Index has lost about 13% this year, almost four times as much as in 2009, the worst full year result on record for the gauge since its 1973 inception.
Yet as the structural support for Treasuries gives way, others have stepped in to pick up the slack, allbeit at higher rates. “Households,” a catch-all group that includes US hedge funds, saw the biggest jump in second-quarter Treasury holdings among investor types tracked by the Fed.
Some see good reason for private investors to find Treasuries attractive now, especially given the risk of Fed policy tightening tipping the US into a recession, and with yields at multidecade highs.
“The market is still trying to evolve and figure out who these new end buyers are going to be,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. “Ultimately I think it’s going to be domestic accounts, because interest rates are moving to a point where they’re going to be very attractive.”
John Madziyire, a portfolio manager at Vanguard Group Inc., said large pools of excess savings held at US banks earning next to nothing will prompt “people to shift into the short-end of the Treasury market.”