Banks loan growth focus could impact US Treasuries: Credit Suisse

[NEW YORK] US banks' appetite for US Treasuries could slow down as they shift their focus to loan growth, at the same time that the Federal Reserve plans to shrink asset holdings and raise interest rates to fight inflation, said Credit Suisse analyst Zoltan Pozsar.

Asset purchases by the Fed contributed to unprecedented liquidity and trading activity through the pandemic, but trading revenue at leading Wall Street banks fell in the 4th quarter as markets normalised and the US central bank started scaling back its asset purchases, which resulted in lower trading volumes.

Bank of America on Wednesday (Jan 19) reported a better-than-expected 30 per cent jump in quarterly profit, partly driven by US$50 billion in record loan growth.

JPMorgan posted a 6 per cent increase in loan growth last week, while its trading revenues declined, and Goldman Sachs on Wednesday missed quarterly profit expectations, hit by weaker trading revenues.

"Our view that bank portfolios will easily absorb US Treasury issuance amid plenty of excess liquidity and slow loan growth is changing now that loan growth is back and QT is approaching", Pozsar said in a report on Wednesday.

Pozsar was referring to "quantitative tightening", a reversal of the Fed's bond-buying stimulus.

Less demand for long-term US Treasuries could put further pressure on yields that have jumped this month as investors adjusted to expectations that the Fed will tighten monetary policy more aggressively to counter unabated inflation.

"We are now at a stage where banks are more interested in making loans than buying securities - and that should have the back end of the Treasury market concerned," Pozsar said.

Rate hikes, and therefore more expensive money, are expected to boost banks' margins as lending rates tend to rise faster than short-term ones banks use to borrow.

Bank executives and analysts have said Wall Street banks expect trading revenues to settle somewhere between pre-pandemic levels and the highs of the past 2 years.

REUTERS