Monday, October 19, 2009

Who is buying all the Treasury debt? a.k.a how bankers are bad traders

Like a worldwide version of Where's Waldo,  a lot of people want to know who is buying all the US Treasury debt being produced by a yawning budget deficit and when they will conversly dump them on the open market.  The Chinese and the Federal Reserve are the first people on everyone's list, but here's another. 

Presented is US Government Securities at all commerical banks.  The first graph shows the absolute change year over years, in billions of dollars.  As you can see US banks have added nearly 240 billion dollars to their portfolios in the last 12 months.   Unfortunately this has not absorbed the entire supply of new issuance in the last 12 months, but it takes a serious chunk of the notes out of circulation.  As this data series is released weekly, I'll be watching it closely to see if the bankers are buying more US debt in the near future. 

Here is the data in a slightly different format so recent events do not dominate the picture, it shows government debt holdings on a year over year percentage basis.  What struck me about this graph is how the banks seem to be adept at raising their treasury holdings as the recessions appear to be ending as shown by the gray vertical shaded areas. 

The bankers appear to consistently purchase US debt just as the recession is finally ending (remember the recession 'end' is backwards looking and it can take several months before a recession is declared as over) and from a trading perspective at exactly the antipodal time to reduce credit risk. 

Also, a bank loading up on US debt is less likely to be making conventional loans to consumers and corporations.  They only have so much room on their balance sheet to hold securities and with all things being equal (yes, I know they aren't)  US Government debt purchases crowd out the possibility of making conventional loans.

Hey, look at that.... Inverse correlation between (US debt) and (loans and leases) on banks books!  It appears the bankers are still running scared and loading up on US treasuries.  Also, look at how loans are declining on a year over year basis, something that has not happened over the entire time period in this graph.  Corporations can access credit via other means (commercial paper, debt markets, etc) but the decline in bank lending  is troublesome.

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