Banks Hoarding Treasuries Signals Economy Still Iffy

Photograph by Andrew Harrer/Bloomberg

The U.S. Department of the Treasury.

If you need another negative indicator today, the market has one.

Banks are hoarding their Treasuries, selling fewer and fewer to the Fed because executives say the economic picture in the U.S. is still murky and financial troubles around the world make the safe debt more valuable.

Bloomberg’s Susanne Walker and Cordell Eddings report today that the biggest bond dealers offered an average of $7.2 billion in Treasuries a day to the central bank in June, down 40.5 percent from a high of $12.1 billion in October. The amount tendered has fallen even as the dealers almost doubled their holdings of the securities, according to data compiled by Bloomberg.

By some measures, Walker and Eddings found Treasuries at about the most expensive levels ever. The term premium, a model created by economists at the Fed, touched negative 0.947 percent July 6, surpassing the most expensive level ever of negative 0.94 set on June 1. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

“There is a reach for quality in the market,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “The Fed and investors are elbowing each other out of the way, and that process is feeding on itself. We are seeing a crowding out effect as there remains a ton of demand for safe assets.”

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