Citigroup to Bank of America Spurn Treasuries for Cash on Taper Risk

Bloomberg

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Never before have America's banks been so wary of risking their cash deposits on U.S. government debt.

After holdings of U.S. debt surged to a record $1.89 trillion in 2012, lenders from Citigroup Inc. to Bank of America Corp. and Wells Fargo & Co. are culling for the first time in six years and amassing dollars. Banks' $1.8 trillion of the bonds now equal less than 70 percent of their cash, the least since the Federal Reserve began compiling the data in 1973.

With net interest margins falling to the lowest since 2006, banks are spurning Treasuries and hoarding unprecedented amounts of cash on prospects that loan demand will revive as a strengthening economy leads the Fed to reduce its own debt purchases. Five years of cheap-money policies also have depressed yields and made it less attractive for banks to buy Treasuries as a way to bolster income.

"Banks reluctant to lend were large holders of Treasuries," Jeffrey Klingelhofer, a money manager at Thornburg Investment Management Inc., which oversees $89 billion, said in a telephone interview from Santa Fe, New Mexico. "Like a lot of other people who have been moving out of fixed income, it's largely to avoid the fallout from tapering."

Corporate Bonds

Klingelhofer said Thornburg owns fewer Treasuries than their allocation in benchmark indexes and prefers investment-grade corporate bonds, cash and some asset-backed securities.

Treasuries, which returned 30 percent in the last five years as the worst financial crisis since the Great Depression boosted demand for the safest assets, have fallen 2.33 percent in 2013 on signs the U.S. economy is gaining strength. The Bank of America Merrill Lynch U.S. Treasury Index fell 0.43 percent last month, snapping two months of gains.

While the slump in Treasuries caused yields on the 10-year notes to soar a percentage point this year, they are still almost a percentage point below the average in 2008, when the Fed started its extraordinary measures to stimulate demand.

The 10-year note yield rose 19 basis points last month, or 0.19 percentage point, to 2.75 percent in New York, according to Bloomberg Bond Trader prices. The 2.75 percent securities due in November 2023 traded at 99 21/32. The yield reached 2.84 percent on Nov. 21, the highest level since Sept. 18. The yield was 2.79 percent at 10:43 a.m. London time.

Bank Boost

After banks boosted Treasuries and bonds issued by federal agencies by 69 percent in the last five years as the crisis depressed lending and regulations designed to limit risk-taking increased, they have pulled back on speculation the Fed will curtail its bond buying as soon as March.

Banks' stakes of Treasuries and federal agency bonds have declined more than $80 billion in 2013, data compiled by the Fed show. That would be the first annual decrease since 2007. At the same time, cash held by banks has surged by a record $882 billion this year to an all-time high of $2.59 trillion.

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