Magazine article American Banker

Banks' Enthusiastic Buying of Treasuries Begins to Cool Off

Magazine article American Banker

Banks' Enthusiastic Buying of Treasuries Begins to Cool Off

Article excerpt

Banks' investment in Treasury securities is leveling off, removing a major source of support enjoyed by the bond market over the past several years.

Loan demand has picked up this year and, in moving to meet it, banks have been far less enthusiastic buyers of government securities.

The banks' shift is probably a key reason why bond prices reacted as negatively as they did to the Federal Reserve Board's recent rate-tightening moves.

"Banks were the biggest buyers of government securities last year, but as things stand right now that is not going to be true again this year," said Sung Won Sohn, the senior economist at Norwest Corp., Minneapolis.

Hurting Bond' Market

"I think that is one of the main reasons why the bond market has been performing very poorly," he said Friday. "It's hard to create an exciting market

when the biggest player is pulling back."

What's more, Mr. Sohn thinks Fed policy, as well as the new loan demand, may be a factor.

"The Fed has been decreasing reserves in the banking system this year," he said. "In fact, they have been less and less accommodative in providing reserves since well back in 1993.

"It is not correct to say monetary policy was stable until the Fed first moved up rates [on Feb 4]," Mr. Sohn said. "They have been tightening down the reserve screws since last year.

"Had credit demand gone up in '93, we would have seen rising rates last year because of this," the economist said. …

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