Banks Have A Powerful Appetite For Treasuries

If there is a silver lining in the slowdown in business lending by commercial banks, observes economist Lacy H. Hunt of the HongkongBank group, it lies in the banks' growing investment in Treasury securities. In light of the $300 billion annual deficits facing the federal government, says Hunt, "the banks' appetite for Treasuries should spell downward pressure on interest rates."

Hunt points out that commercial bank investments in government securities averaged about 59% of commercial and industrial loans from late 1986 through late 1989. But since then, they have moved sharply higher, hitting an all-time peak of 72.4% in February of this year. Such investments relative to bank holdings of other securities have also soared.

With corporate balance sheets overloaded with debt and banks eager to strengthen their asset positions, says Hunt, bank investment in government securities is likely to accelerate. "The negative impact of slower bank-loan growth," Hunt says, "will be offset by the positive effect of bank buying of government debt on the credit markets."