Banks Dump Treasuries for Loans as Yields Jump: Chart

U.S. commercial banks are dumping Treasuries at the fastest pace in a decade and boosting loans, helping make the debt securities the world’s worst performers as the economy gains momentum.

The CHART OF THE DAY shows banks’ holdings of U.S. Treasury and agency debt tumbled $34.7 billion to $1.81 trillion in July, the biggest monthly decline in 10 years, according to the Federal Reserve. The level dropped to $1.79 trillion in the first week of August, Fed data showed on Aug. 16. Also tracked are 30-year bond yields climbing to a two-year high. The lower panel records commercial and industrial loans as they surged to $1.57 trillion, the highest since 2008.

Bank sales of Treasuries accelerated after Federal Reserve Chairman Ben S. Bernanke said on June 19 policy makers may reduce the bond-buying program they use to support the economy. Concern the Fed will trim its $85 billion a month of Treasury and mortgage purchases helped send notes and bonds due in a decade or longer down 11 percent in the past 12 months. It was the biggest loss of 174 debt indexes tracked by Bloomberg and the European Federation of Financial Analysts Societies.

“Banks are holding lots and lots of Treasuries,” said Ali Jalai, who trades the securities at Scotiabank in Singapore, a unit of Canada’s Bank of Nova Scotia (BNS), one of the 21 primary dealers that deal directly with the U.S. central bank. “As loan demand picks up, they’re going to reduce their Treasuries. Tapering fear has caused banks and individuals to reduce some of their bond holdings.”

Yields (USGG30YR) on 30-year bonds rose to 3.88 percent today, the highest level in two years. Gross domestic product grew an annualized 1.7 percent in the second quarter, accelerating from 1.1 percent in the first, based on Commerce Department figures. The recovery will strengthen to 2.7 percent next year, a Bloomberg News survey of economists showed.

The Fed will begin to reduce bond purchases next month, according to 65 percent of economists surveyed by Bloomberg from Aug. 9-13. Investors and analysts will be looking for clues on Aug. 21 in the minutes of the central bank’s most recent meeting.

To contact the reporters on this story: Kevin Buckland in Tokyo at kbuckland1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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