Goldman: Material Decline Q122 Bank Buying Suggests Diminished Support

Goldman Sachs note that “on expectations of higher rates, moderate loan demand, and a gradual pace of policy rate tightening, we had anticipated that commercial banks would be one of the larger buyers of U.S. Treasuries. However, Fed H.8 data show bank U.S. Tsy and non-MBS agency debt purchases have been anemic this year; while smaller domestic banks appear to have bought about $40bn YTD, larger banks appear to have shed about $20bn. Because these data co-mingle available-for-sale (AFS) and held-to-maturity (HTM) holdings, periods with large shifts in fair value could introduce noise when interpreting changes in levels, and on net, may be understating purchases. The magnitude of any buying, however, is unlikely to have been large even with valuation adjustments. A big reason for this shortfall relative to our expectations is the much stronger than expect growth in loan demand, which stood at around a 9% annualized in Q1 for large cap banks, which we’ve noted previously would displace banks’ securities demand. Another factor has been elevated market volatility; the large increase in interest rates in the first quarter has meant the larger banks, which cannot opt out of AOCI flowing through CET1, were wary of adding exposure in their AFS portfolios. Smaller banks, which can opt out, ended up purchasing more securities as a result, despite their smaller aggregate size. Overall, irrespective of size, banks appear to have increased holdings in their HTM portfolios, either as a result of additional purchases or because of recategorization. Looking ahead, we suspect banks’ U.S. Tsy demand will pick up for a few reasons. First, our banks analysts expect loan demand to moderate over the course of the year. Second, as investors develop greater clarity about the policy rate path, and price volatility diminishes, the economics of purchasing securities should improve. However, these changes are likely to occur only as we move into 2H22, and as a result we lower our bank U.S. Tsy demand estimate for this year from $350bn to $175bn.”