Banks stuff themselves with bonds, but not because they want to

The economy is growing. Companies are recruiting. Stocks are skyrocketing. And the banks are sitting on big piles of money.

If only they had a better place to put it.

Persistent supply chain problems and anxiety over the potential of the Delta variant of the coronavirus to disrupt the economy again have reduced corporate borrowing. And consumers overflowing with cash from the government’s stimulus efforts aren’t borrowing much either.

Thus, banks have been largely left to invest in one of the least lucrative assets: government debt.

Treasury bond rates are still near all-time lows, but banks have bought government debt like never before. In the second quarter of 2021, banks bought a record about $ 150 billion in treasury bills, according to a note released this month by analysts at JPMorgan.

It’s a strategy that’s almost guaranteed to produce meager profits, and banks aren’t happy to do it, analysts say. But they have little choice.

“Widget companies make widgets and banks make loans,” said Jason Goldberg, banking analyst at Barclays in New York. “This is what they do. This is what they want to do.”

By placing their clients’ deposits in investments such as loans or securities, such as treasury bills, banks earn the money needed to pay interest on those deposits and pocket a profit. When the economy is growing, like today, banks usually have no problem finding borrowers as consumers buy heavily and businesses grow. These loans offer better returns than treasury bills, which are usually reserved for times of uncertainty because banks will accept their lower rate of return in place of a risky loan.

Borrowing briefly increased when the pandemic hit, as businesses used lines of credit. But the currently booming economy is not producing demand for loans, just as banks have a lot of money to lend.

Businesses already have enough money, have other avenues to raise funds, or see little reason to undertake a risky expansion amid the still smoldering pandemic. And consumers are not only avoiding new loans, they are paying off old ones, thanks to the trillions of dollars the federal government has spent to cushion the financial blow of the pandemic.

“There was this economic expansion resulting from what was a major contraction,” said Bain Rumohr, an analyst covering North American banks at rating firm Fitch. “And generally what would happen would be, yes, increased demand on the business side and on the consumer side. And it just hasn’t manifested yet.

The weak demand for loans reflects the government’s success in protecting businesses and households from ruin during the pandemic.

Through two presidential administrations, the federal government embarked on a major borrowing and spending program to help small businesses, large businesses and households weather the worst of the shock. Between March 2020 and May 2021, Congress allocated approximately $ 4.7 trillion for such programs, thanks to the passage of six Covid-19 relief laws signed by President Donald J. Trump and President Biden .

Much of that money went into the bank accounts of American households and businesses. By the end of May, nearly $ 830 billion in stimulus checks had been sent to individuals. About $ 800 billion more has been sent to businesses in the form of programs such as the Paycheck Protection Program. And about $ 570 billion has been spent on extended and improved unemployment insurance benefits, according to data from the Government Accountability Office.

It worked. While the slowdown has been brutal, the coronavirus recession is the shortest on record, lasting just two months, and the economy has already more than recouped its losses.

But for banks, this flood of government payments has been a mixed blessing.

This has undoubtedly kept them from incurring losses on loans to individuals and businesses that would otherwise have defaulted. But it has also resulted in much healthier bank account balances for American businesses and consumers. Deposits in the commercial banking system have increased nearly 30% since just before the pandemic, to about $ 17.3 trillion.

To make money, banks have to reinvest those idle dollars, but that is proving difficult. Not only do businesses and households have plenty of cash, their desire for borrowing has weakened as the Delta variant complicates plans to reopen.

Uncertainty over the reopening of offices appears to be slowing demand for loans from commercial real estate developers, a normally lucrative lending source. Other reliable sources of borrowing have also slowed: Auto dealers, who borrow to keep their lots in stock, aren’t borrowing as much because grunts in the supply chain have weighed on auto production.

Banks have recognized their difficulty in finding attractive ways to deploy their deposits.

Bank of America shares stumbled last month after posting earnings that disappointed investors, in part due to a slower-than-expected recovery in loan balances. Asked by analysts about a profitable area where loan balances have been declining – high interest credit card balances that people don’t pay off every month – Bank of America chief executive Brian Moynihan explained just the drop.

“They just have more money,” he said. “And so they paid off their credit cards, which is a totally responsible thing for them.”

It was a common refrain. Wells Fargo saw a decline in commercial lending in the second quarter, explaining that its customers “continued to have high levels of liquidity.”

Michael Santomassimo, chief financial officer of Wells Fargo, told analysts there were “green shoots” in some industries, but “aggregate demand has yet to pick up.”

And M&T Bank, a Buffalo-based lender that focuses on the northeastern and mid-Atlantic states, had fewer loans on its books at the end of the quarter as the bank struggled to find locations profitable to invest money.

“Customer deposits are at record highs and have grown faster than our ability to deploy them into assets,” Darren J. King, the bank’s chief financial officer, told analysts.

Banks have therefore turned to government bonds, whose interest rates have been low for more than a decade. When the yield on 10-year treasury bills briefly hit around 1.75% in March and April, banks hungry for higher yields rushed to buy them – a rush that explains why soaring interest rates didn did not last, analysts said.

Bond yields move in the opposite direction of bond prices, and as long as banks have few better alternatives, they will continue to buy bonds. And that could help keep rates under control for a while.

“This is one of the reasons rates remain low,” said Gennadiy Goldberg, senior analyst covering the government bond market at TD Securities in New York.

The dynamics are unlikely to change until companies and entrepreneurs have a better idea of ​​future economic conditions, which the Delta variant prevents for the time being by making the flow of goods to manufacturers and workers back. at work difficult to predict.

Companies would certainly like to invest more, said Goldberg, the analyst at Barclays. “But given the constraints of the supply chain and, I think, the difficulty in finding skilled workers, they took a long time to put that money to work.”