The government did itself a favor by bailing out banks.
That’s because banks are using some of their newfound deposits to buy Treasury bonds, keeping interest rates from rising much amid fears of inflation.
Bank holdings of U.S. government securities have jumped 15.6 percent from a year ago, almost double the average annual growth rate of about 8 percent since the Federal Reserve began tracking the data in 1973, according to MKM Partners, as cited by Bloomberg.
As issuance of corporate and mortgage bonds slows, banks are sending their money to Treasuries instead.
“We expect demand to shift to Treasuries, given low net supply in corporates,” Srini Ramaswamy, a fixed-income strategist at JPMorgan Chase, wrote in a report last month, according to Bloomberg.
JPMorgan’s models “suggest that bank purchases of corporates and mortgage-backed securities will be small relative to the growth in deposits net of loans, which have been growing at a rate of roughly $29 billion per month.”
Banks’ buying spree of Treasuries will help keep a lid on interest rates. The 10-year yield will end the year at 3.67 percent, little changed from 3.62 percent Monday, according to the median estimate of 65 strategists and economists surveyed by Bloomberg.
Not everyone sees smooth sailing ahead for Treasuries. "Investors are buying more risk assets like equities, and Treasuries are suffering," John Spinello, chief fixed-income technical analyst at Jefferies & Co, tells Reuters.
"All these positives about the economy and the stock market are coming at the expense of Treasuries.”
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