Banks not buying what the US government is selling

There's at least least one good reason why Treasury yields have been drifting higher all year: Banks haven't been buying.

In fact, total U.S. government debt holdings by the 18 largest banks in the country declined by $2.6 billion in the first quarter, according to SNL Financial data that Citigroup cited in a note Tuesday titled, "The Bid for Treasuries is Over."

The decline in purchases of Treasurys mirrored a general slowing in securities growth in the quarter, with holdings increasing by just $18 billion after rising $42 billion in the fourth quarter of 2014 and $61 billion in the third quarter.

Bond yields have been volatile through the year and on a general glide higher overall. The benchmark 10-year Treasury note began the year at 2.12 percent and traded around 2.24 percent Tuesday afternoon. The 10-year's price, which moves inversely to yield, has fallen 2.26 percent in 2015.

Fixed income bears believe U.S. economic gains and a less accommodative Federal Reserve will result in significantly higher interest rates this year. However, gross domestic product has shown only halting progress so far—and in fact could see a negative number when first-quarter revisions are through—while market expectations for a Fed rate hike are pegged firmly at the latter part of the year.

Read MoreCalling the death of bonds (and missing) again

Of the biggest U.S. banks, most mildly added to their portfolios, but sharp drops from Bank of America, JPMorgan Chase and Morgan Stanley offset those gains. Wells Fargo was the biggest buyer in the quarter. ( Tweet This )

Some select banks and their Treasurys holdings:

Banks and their bonds

Change in Treasurys holdings ($Billion)
Wells Fargo WFC 7.2
BNY Mellon BK 3.8
State Street STT 2.3
Citigroup C 0.5
Capital One COF 0.5
Morgan Stanley MS -4.7
JPMorgan Chase JPM -1.4
Bank of America BAC -10.7
Source: SNL Financial/Citi

While they weren't purchasing Treasurys, banks did increase their holdings in residential mortgage-backed securities, which rose by $28.5 billion in the quarter. They also purchased $6.4 billion in municipal bonds and added $2.2 billion in collateralized mortgage-backed securities, according to SNL and Citi.

Besides Treasurys, banks also shed $7.8 billion in "other debt" as well as $4.9 billion in asset-backed securities and $3.3 billion in agency debt.

While banks dumped Treasurys, foreign holdings held up, inching higher in the first two months of the year—the most recent data available from the Treasury Department—and growing 4.6 percent on an annualized basis to $6.16 trillion.

Japan is now the world's largest holder of U.S. debt with $1.2244 trillion, just ahead of China's $1.2237 trillion.