- The Washington Times - Tuesday, August 4, 2009

U.S. lenders bailed out by the government are returning the favor by stepping up purchases of Treasuries, helping to temper a rise in borrowing costs.

Bank holdings of U.S. government securities are up 15.6 percent from a year ago, almost double the average annual growth rate of about 8 percent since the Federal Reserve began tracking the data in 1973, according to the Greenwich, Conn.-based trading and research firm MKM Partners LP.

Purchases may accelerate as lenders look for places to park rising deposits as sales of the federal-agency debt of companies such as Fannie Mae and corporate bonds slow.

“We expect demand to shift to Treasuries, given low net supply in corporates,” Srini Ramaswamy, a fixed-income strategist at New York-based JPMorgan Chase & Co., the second-biggest U.S. bank, wrote in a report July 24.

Increased demand for U.S. debt by lenders may help keep a lid on yields as the government sells what Barclays PLC estimates will be a record $2.1 trillion in securities this year and the Fed comes to the end of its Treasury purchase program.

Ten-year Treasury yields, a benchmark for everything from mortgages to company debt, may end the year at 3.67 percent, according to the median estimate of 65 economists and strategists surveyed by Bloomberg.

The U.S. raised $1.02 trillion from debt sales this year to help finance spending plans designed to pull the economy out of the deepest recession since the 1930s, government data show. Barclays estimates $1 trillion more will be sold in the second half of the year. The budget deficit will reach $1.85 trillion in 2009, according to the Congressional Budget Office.

Concern that the government will have trouble selling the debt contributed to a loss of 4.08 percent for Treasuries this year through July, according to Merrill Lynch & Co. index data. The yield on the benchmark 10-year note Monday was 3.64 percent, up from this year’s low of 2.14 percent on Jan. 15, according to BGCantor Market Data.

Bond bulls are taking comfort that at the same time Treasury supply is increasing, gross issuance of corporate debt is falling. Company bond sales will decline to $300 billion from $615 billion in the first six months of the year, according to JPMorgan. Net new issuance of bonds after redemptions should fall to almost zero from $271 billion, according to the firm.

Outstanding unsecured debt issued by the Federal Home Loan Banks, Washington-based Fannie Mae, and Freddie Mac in McLean, the largest borrowers in the agency market, dropped 8.2 percent to $2.76 trillion through June, according to data compiled by Bloomberg. New York-based Citigroup Inc. projects more declines.

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