BofA Leads U.S. Banks With Insatiable Demand for Mortgage Bonds

Big U.S. lenders led by Bank of America Corp. can’t seem to get enough government-backed mortgage bonds, thanks in part to new regulations.

The latest evidence comes via regulatory data for last quarter, which show a $45.3 billion increase among the 50 biggest bank holders, compared with a $10.6 billion gain in Treasuries, Morgan Stanley wrote in a report Thursday. A more timely -- though also less precise -- measure from the Federal Reserve shows a record $1.45 billion across all commercial banks at the end of April.

The demand, which is bolstering the $5.5 trillion market for home-loan bonds guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, comes with the lenders dealing with new rules that require them to hold enough easy-to-sell assets to survive a financial crisis.

“Banks report so far that Treasury debt and MBS pass-throughs meet regulators’ standards much more easily than other assets” that count, Deutsche Bank AG analysts including Steven Abrahams and Christopher Helwig wrote Wednesday in a report. Those other assets can include more complex mortgage bonds and limited amounts of corporate debt.

A spike in the yields on government-backed mortgage securities relative to Treasuries in January may have helped boost banks’ buying. Higher absolute yields may encourage even more purchases if interest rates stabilize, according to a Thursday report by Credit Suisse Group AG analysts led by Mahesh Swaminathan.

Fed Odds

A steady rise in their deposit base, which reached a record $1.07 trillion last month, and greater perceived odds that the Fed will hold the cost of that funding near zero for longer may also be contributing.

Bank of America boosted its holdings of the home-loan bonds last quarter by $16.1 billion to $281.4 billion, while decreasing Treasury investments by $10.1 billion, according to the report by Morgan Stanley analysts led by Vipul Jain. Jerry Dubrowski, a spokesman for Bank of America, declined to comment.

PNC Financial Services Group Inc. increased mortgage-bond holdings by $5.2 billion, the second most, while JPMorgan Chase & Co. stood out with a $9.2 billion drop, according to Morgan Stanley.

Liquid Assets

Weekly Fed data on banks’ holdings can be effected by changes in market values and include some commercial-mortgage securities along with home-loan bonds. The most recent figures show their agency mortgage-bond investments up from about $1.4 trillion at the start of this year and $1.32 trillion a year before that.

Holdings of Treasuries and debt issued by U.S. agencies and government-affiliated companies ended April at $659 billion, down from a record $669 billion in February. They entered the year at $650 billion, compared with $487 billion a year earlier.

Banks last year focused on adding debt such as Treasuries that count as fully liquid assets under the regulations. The rules may increase bank demand for the various categories of acceptable bonds in future years as their reserves held at the Fed decline with the central banks’ own holdings of debt, according to the Deutsche Bank analysts.

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