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Here's What Banks Are Buying This Summer

Bank Vault Door
James Porter | Brand X Pictures | Getty Images
Bank Vault Door

Bonds backed by the U.S. government are back in fashion in banking.

Commercial banks in the United States now hold $1.84 trillion in debt issued by the United States federal government, or bonds issued by or backed by the two housing agencies held in conservatorship by the government.

That's a new record.

Until midway through this year, banks had been actally reducing their holdings of non-mortgage Agency and Treasury debt since the end of 2010, as you can see in the chart below. The selling stopped around June of this year. Now banks are back to accumulating Treasury and Agency debt.

Banks have slightly slowed their accumulation of mortgage securities backed by Fannie Mae and Freddie Mac, although they are still net buyers in this area. At the same time, however, the sell-off in mortgage-backed securities overall has slowed down, suggesting that banks are growing more confident in their portfolios of these securities. (Related: 'Wind Down' of Fannie, Freddie a 'Positive'?)

The biggest shift, as the chart below shows, is the dramatic turnaround in Treasury and Agency securities. It appears that banks aren't as afraid of the low yields in Treasury bonds as some market pundits are. (See:What Bubble? Why Bond Pros Are Still Betting on Junk)

One possible reason for the shift may have been an expectation of renewed Treasury purchases as part of a new round of quantitative easing. It may also be an adjustment to new capital adequacy requirements. The higher requirements under Basel III can make holding Treasury bonds, against which banks do not have to set aside any capital, financially sensible even at record low yields. (See: How Does the Yield Curve Work?)

But that's really just speculating. Banks do what banks do. And what they've done is start piling up Treasury and Agency bonds again.

- by CNBC.com senior editor John Carney

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Follow John on Twitter. (Market and financial news, adventures in New York City, plus whatever is on his mind.) You can email him at john.carney@nbcuni.com.

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