The US banking industry is buying US Treasury bonds at the fastest speed since the pandemic, and strategists at RBC Capital Markets warn that this boom may cool down.
According to weekly data released by the Federal Reserve, in the two weeks ending March 13, commercial banks bought a total of 103 billion US dollars in US Treasury bonds and unsecured securities backed by federal agencies. This data is viewed by analysts as a barometer for measuring demand for US bonds. According to RBC statistics, the indicator recorded the biggest two-week percentage increase since June 2020.
Blake Gwinn, head of US interest rate measurement at RBC Capital Markets, said, “Since deposit balances are still very high, loan growth is slow, and the Fed is close to entering a cycle of interest rate cuts, it is reasonable for the banking sector to increase its holdings of US Treasury bonds with high yields.” However, given the strong buying situation over the past two weeks, RBC analysts believe that “there may be other external factors affecting these data. The exact details are not fully understood.”
The message conveyed by Federal Reserve Chairman Powell at the end of the policy meeting last week was that if price pressure continues to slow, the Federal Reserve will cut interest rates sometime this year.
Gwinn added that the reason why banks bought US Treasury bonds in large numbers did not trigger a reaction in the market is probably because they are buying low-term bonds. He anticipates that banks' demand for US Treasury bonds will continue in the medium to long term.
According to the data, bank purchases mainly come from some of the largest financial institutions in the US.
Earlier this week, TD Securities strategists linked recent banks' demand for debt purchases to the Federal Reserve's remarks.
Dallas Fed President Lorie Logan said in early January that policymakers should start considering when and how to start slowing the downturn by increasing reinvestment. Federal Reserve Governor Christopher Waller also discussed this issue in his March 1 speech. He is in favor of increasing the share of short-term US Treasury bonds in the Fed's balance sheet.
However, Gwinn wrote, “When banks actually start increasing their long-term holdings of US debt, it is more likely to take the form of running thin water; it won't be a sudden surge in two weeks.”