While speculators in 'risk assets' have been slightly daunted by the sell-off in silver, the stock market continues to hover near its highs. Alas, US banks are still not lending to the private sector – not so much because they don't want to lend – lending standards have loosened sufficiently by now – but because there is evidently no demand for credit. Instead the banks are once again buying US Treasury bonds by the wagon-load, i.e. they are lending to the entity they regard as the safest debtor.
U.S. banks are buying U.S. government securities at the fastest pace in nine months as lenders retreat to the safety of Treasuries with the economy expanding slower than forecast and loan demand dormant.
Commercial banks bought $65 billion of U.S. debt in the past seven weeks, as their total holdings reached $1.68 trillion, Federal Reserve data show. The purchases were the most since $79.1 billion in the period ended July 21, just before the recovery began to falter and Fed Chairman Ben S. Bernanke signaled policy makers would conduct a second round of bond purchases to spur growth.
Economists from JPMorgan Chase & Co., the second-largest U.S. bank by assets, to Credit Suisse Group AG, the No. 2 Swiss lender, are lowering growth forecasts as rising fuel prices cut disposable income and housing prices continue to fall. Bonds are helping bolster earnings as the Fed keeps its target interest- rate for overnight loans between banks at a record low.
“The idea that we’re going to see anything remotely approximating robust growth is quickly fading,” said Jeffrey Caughron, a partner at Baker Group LP in Oklahoma City who advises community banks on investments of more than $30 billion. “They simply don’t have the loan demand, or good loan demand. They have to keep their money working for them, so there’s no place else to go but the bond market.
As we noted Monday already, the bond market has lately been suspiciously strong in the face of a further advance in equities. We can only reiterate in this context that risk remains very high.
