"Treasuries Irresistible to America’s Banks Awash in Cash"

From Bloomberg:

America’s banks are regaining their appetite for U.S. government debt.

After culling Treasuries and bonds issued by federal agencies last year for the first time since 2007, commercial lenders such as Bank of America Corp. (BAC) have boosted their holdings every month this year, Federal Reserve data compiled by Bloomberg show. Banks now own $1.85 trillion of the debt, within 2 percent of the record amount held at the end of 2012.

With a lackluster job recovery and higher mortgage rates damping loan growth, banks are tapping record deposits to plow more money into government debt as regulations designed to limit risk-taking take effect. The demand helps explain why Treasuries are rising from the deepest losses since 2009, confounding forecasters who foresaw declines as a strengthening U.S. economy prompted the Fed to cut back its own bond buying.

“The economic situation is still not fully bared out and they have to do something with their cash,” Jeffery Elswick, director of fixed-income at Frost Investment Advisors, which oversees about $5 billion in debt securities, said in an April 23 telephone interview from San Antonio. “Banks have been big buyers of Treasuries. They need safe assets.”

Treasuries have returned 2.2 percent this year, rebounding from a 3.4 percent loss in 2013. The longest-dated government debt has rallied the most, with 30-year bonds surging 10.8 percent in the best start to a year since at least 1988, index data compiled by Bank of America Merrill Lynch show.

Treasuries Demand
Debt investors have embraced Treasuries this year as labor-market gains have proven elusive and consumer spending remains below the Fed’s target, even after the central bank flooded the U.S. economy with more than $3 trillion in cheap cash since the financial crisis to stimulate growth.

The simmering conflict between Russia and Ukraine has also boosted demand for the safest assets, upending forecasts by economists for yields to rise throughout the year as the Fed moves to scale back its monthly purchases of Treasuries and mortgage-backed securities.

Yields on the 10-year note, which reached a 29-month high of 3.05 percent in January, have since fallen and ended at 2.66 percent last week. The yield was 2.67 percent at 8:42 a.m. in New York....MUCH MORE