Bond yields fall as demand for government bonds rises... US government burden for 'economic stimulus' also decreases
[Asia Economy Reporter Jeong Hyunjin] U.S. commercial banks are playing a major role in the U.S. Treasury market. Due to the impact of the novel coronavirus disease (COVID-19), deposits have increased while loans have decreased, leading banks to purchase large amounts of Treasury securities. The expanded demand for Treasuries has lowered bond yields, reducing the cost burden on the U.S. government, the issuer.
According to the Wall Street Journal (WSJ) and others on the 20th (local time), the amount of U.S. Treasuries and agency securities (excluding mortgage-backed securities) held by U.S. commercial banks reached $1.19 trillion (approximately 1,383.6 trillion KRW) in early this month. This is an increase of $250 billion over about six months from $940 billion at the end of February, when COVID-19 was at its peak. Considering that these banks held $640 billion in Treasuries in September 2015, the amount has nearly doubled in five years.
Bank purchases of Treasuries surged in March as COVID-19 spread rapidly within the U.S. Subsequently, with large-scale fiscal and monetary policies implemented by the U.S. government and the Federal Reserve (Fed), the holdings decreased in April. However, as COVID-19 began to spread again, the holdings started to increase once more. In June, the amount exceeded $1 trillion for the first time ever.
The WSJ explained this phenomenon by noting that while deposit holdings increased after COVID-19, loans decreased. Due to uncertainty, consumers tended to reduce spending and accumulate deposits. From the banks' perspective, with increased assets compared to the past, they became more interested in purchasing safe assets such as U.S. Treasuries.
Not only commercial banks but also money market fund (MMF) assets, which focus on short-term financial products to generate returns, have significantly flowed into the Treasury market. Funds poured into MMFs composed solely of Treasuries and government-backed securities, and MMF managers increased the proportion of short-term Treasuries with maturities under one year. As a result, MMF holdings of U.S. Treasuries more than doubled from $920 billion in February to $2.12 trillion by the end of August.
Experts evaluated that the active Treasury purchases by banks and MMFs in the market have also reduced the government's cost burden. There has been no significant rise in yields on more than $3 trillion of Treasuries issued since February. The yield on the 10-year U.S. Treasury was 1.909% at the end of last year but fell by more than half to 0.694% on the 18th. Increased demand for Treasuries lowers interest rates. Mark Cabana, U.S. interest rate strategist at Bank of America (BoA), said, "Banks' Treasury purchases will financially support the government, which is running a huge deficit."
Some express concerns that the situation could change if banks expand lending as the economy recovers and investors withdraw funds from MMFs. However, most experts expect that deposit volumes at banks will continue to increase for the time being, given that the Fed is continuously supplying liquidity to the market through asset purchases and other measures.
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