Banks' record treasuries stockpile boosts case for Fed to hold

[SINGAPORE] US banks are gorging on Treasuries in the latest sign investors expect the Federal Reserve to postpone raising interest rates.

Commercial lenders have boosted their holdings to a record US$2.15 trillion, based on Fed data. The stake is almost double what China, the biggest US foreign creditor, owns. Treasuries have been advancing since the middle of June, with 10-year yields dipping below 2 per cent this week, on speculation the absence of inflation means rates will stay put.

"As to why they're holding all these Treasuries, the view of the Fed has changed," said Ali Jalai, who trades bonds in Singapore at Bank of Nova Scotia. "Maybe they're not going to raise rates this year." The bank is one of the 22 primary dealers that trade directly with the US central bank.

Benchmark 10-year yields were little changed at 2.02 per cent as of 11.13 am in Tokyo, according to Bloomberg Bond Trader data. The 2 per cent security due in August 2025 traded at 99 27/32. The yield may fall to 1.75 per cent by year-end, Mr Jalai said.

Investors have been reducing forecasts for a Fed rate increase since August as inflation stagnates in the world's biggest economy. US consumer prices fell in September by the most since January, a government report showed on Thursday.

The probability of an increase by the December policy meeting has dropped to 30 per cent from 70 per cent odds at the start of August, according to futures data compiled by Bloomberg. The calculations are based on the assumption the effective fed funds rate will average 0.375 per cent after liftoff.

BLOOMBERG