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Banks Hoard Cash, Support Government Bond Market at Trader’s Narrative





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The US financial system was resuscitated by the largess of the taxpayer. Without any real quid pro quo, transparency nor discussion, they were made whole. Their losses made public while their profits were guaranteed to remain private (as the recent obscene bonuses attest).

So now that the US economy is still on the ropes, fighting for its very survival and in dire need of a liquidity transfusion of its own via the credit markets, where are the banks?

Surely they are pumping the lifeblood they received from the US treasury and the Fed back into large and small businesses that are the engines of growth to allow the economy the same recovery they enjoyed. Right? right? Well, no. In fact, if you assumed that you couldn’t be more wrong.

US bank lending contracts at record rate Oct 2009

As you can see from the chart above, bank lending in the US has contracted to an unprecedented degree. You may notice that a contraction of some shape or form happens each time we have a recession (the dark bars). And you would be right. But we are not taking a random walk down Wall Street these days. These are extraordinary times, which required extraordinary measures - whether rightly or wrongly.

So what are the banks doing with all the cash they received from the hard working American Joe and Jane Sixpack?

Hoarding it like a miser:

US banks hoard 1.2 trillion cash Oct 2009

So we have banks flush with cash, not lending to those who need it and deserve it, but rather sitting on the cash or in Goldman’s case, using it to generate billions of dollars in profit which then is promptly cut in half to be paid as bonuses.

As David Rosenberg of the Toronto boutique firm, Gluskin Sheff posits, this may be why the US government bond market is so subdued:

The banks are deploying the cash in the government bond market, buying a net
$27 billion in the latest week and $130 billion in the past 18 weeks. Meanwhile, cash reserves keep piling up and just reached an all-time high of $1.2 trillion — enough to finance the entire U.S. fiscal deficit. This is a nice back-of-the-door mechanism for how the Fed is monetizing the government’s endless need for money: bolster reserves at the big commercial banks and have these banks buy the bonds that Uncle Sam sells in order to raise the capital needed to fund all the government’s fiscal stimulus measures.

Here is a very long term chart of the US 30 year bond yield:

US 30 year bond yield long term chart Oct 2009

SFO cover magazine free offer.pngThe Chinese have a saying: ‘May you live in interesting times.‘ All I dare hope is that things don’t get any more interesting than this.

By the way, here is an almost too good to be true offer for my US readers. For a limited time, you can get a complimentary subscription (aka FREE) to SFO magazine (Stocks, Futures, and Options).

It takes less than a minute to sign up and you need to provide some basic information. But as I mentioned, you need to be a resident of the US (because you need to provide a US address). Enjoy!

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