Banks' boost in purchases of longer-term U.S. debt while clamping down on lending reminds some...

Banks' boost in purchases of longer-term U.S. debt while clamping down on lending reminds some of Japan in the 1990s. "Banks buy more and more government bonds, it will be very difficult for the Fed to raise interest rates because they will lead to massive losses in the banks and cause them trouble all over again."
Comments (7)
  • Mudduckk
    , contributor
    Comments (97) | Send Message
    Caught in a trap...
    I can't hold back...
    Because I love you too much baby...Yea-ah!
    3 May 2010, 10:22 AM Reply Like
  • jcliff
    , contributor
    Comments (6) | Send Message
    Of course the banks are very limited in their ability to make investments, mostly Treasuries and agencies so they have been getting killed on the short end of yield curve, especially small banks and regionals who have traditionally had a substantial amount of their assets in their investment portfolios. So in exasperation, looking for somewhat higher yield, they traverse out on the duration high wire. I really don't agree that the Fed will provide a safety net for them.
    3 May 2010, 10:25 AM Reply Like
  • Tom Au, CFA
    , contributor
    Comments (6879) | Send Message
    The underlying problem is that interest rates are too low to compensate for credit risk.


    Which is why "easy Al's" low interest rate policy was foolish.
    3 May 2010, 10:29 AM Reply Like
  • Tack
    , contributor
    Comments (16556) | Send Message
    As the economy improves, the banks will move funds from the Government into the private sector, at very nice spreads. The Fed will be accommodating --maybe, too accommodating-- by retaining low rates until this occurs, confirming the recovery, all the further.


    It's going to be this reticence on the part of the Fed that may expose the economy to inflationary pressures.
    3 May 2010, 10:41 AM Reply Like
  • Harry Tuttle
    , contributor
    Comments (2213) | Send Message
    Surprise! Bernanke and Geithner tried sooo hard to avoid the Japanese conundrum that they went 360.
    3 May 2010, 11:21 AM Reply Like
  • Albertarocks
    , contributor
    Comments (2216) | Send Message
    > Banks are increasing purchases of U.S. government securities to pump up profits while lending to businesses languishes near the lowest levels since credit markets started to freeze almost three years ago. <


    To pump up profits? How do you pump up profits by buying an instrument that's sure to tank? Bernanke can keep rates at zero for as long as he wants to, but it's not Bernanke who controls rates on treasuries. If banks controlled rates on government bonds and treasuries, Greek bonds would only be paying perhaps 1/4 of their rate seen today. Nope, it's bond vigilantes who control rates. They simply targeted Greece first. Spain or Portugal or Ireland will be their next target. Eventually they'll zero in on American bonds. That's a 100% certainty.


    More likely, the banks are buying treasuries because they have little choice. Either they participate and "help the FED out" by purchasing treasuries, or treasury rates go through the roof. Pick your poison. Why else would they be purchasing treasuries? Do they think interest rates globally are going down in the next year, making their purchases of US debt more valuable? I don't think so, although it's not inconceivable that over the next year or two (for as long as it takes to unwind the past decades of credit expansion and for Europe to fall apart) there may indeed be some demand for US treasuries, but for all the wrong reasons. Two years? Perhaps a couple of years is possible IHMO.


    It might be reasonable to expect European bonds of every color to fall hard over the next year or two. If the net result of that is a temporary "flight to quality" of US debt, then perhaps the banks aren't so foolish to buy them after all. But what's most alarming is the reason US treasuries hold up (if they do). It's certainly not because we're enjoying a robust economy. How could we be enjoying a robust economy (as reported by the propaganda branch of the FED) when according to Bloomberg, they're "clamping down on lending"? "Clamping down" might be the understatement of the year. It would be because the rest of the world is burning and we just haven't caught fire yet. The US bond markets may well hold up until the bitter end, but they too have little choice but to eventually go up in smoke. If I'm wrong, interest rates will stay at zero forever. Who out there really believes that's what's in store?
    3 May 2010, 11:32 AM Reply Like
  • serpico1961
    , contributor
    Comments (8) | Send Message
    Hey AlbertarocksI agree with many of the points you make but you don't need to be a banker to figure out that if you can borrow money from the fed at 0 percent, and then turnaround and buy Tbills and government bonds yielding from 1-3.9% in ten years, you will make money. The countless other investment vehicles being used with tax payer funds, since we fund the fed, to reap Billion dollar quarterly profits are also much safer than making consumer and business loans.
    Its just a matter of time as you point out, that the rest of the world sinks and then America next. The math we have all been living with will help the markets to correct themselves. There will be a bitter end someday, I feel sorry for my children.
    3 May 2010, 08:36 PM Reply Like
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