Never before have America’s banks been so wary of risking their cash deposits on U.S. government debt.
After holdings of U.S. debt surged to a record $1.89 trillion in 2012, lenders from Citigroup Inc. to Bank of America Corp. and Wells Fargo & Co. are culling for the first time in six years and amassing dollars. Banks’ $1.8 trillion of the bonds now equal less than 70 percent of their cash, the least since the Federal Reserve began compiling the data in 1973.

With net interest margins falling to the lowest since 2006, banks are spurning Treasuries and hoarding unprecedented amounts of cash on prospects that loan demand will revive as a strengthening economy leads the Fed to reduce its own debt purchases. Five years of cheap-money policies also have depressed yields and made it less attractive for banks to buy Treasuries as a way to bolster income.
“Banks reluctant to lend were large holders of Treasuries” Jeffrey Klingelhofer, a money manager at Thornburg Investment Management Inc., which oversees $89 billion, said in a telephone interview from Santa Fe, New Mexico. “Like a lot of
other people who have been moving out of fixed income, it’s largely to avoid the fallout from tapering”

Eoin Treacy's view

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In the futures markets it is not unusual to see a change of direction around contract roll dates since these events force market participants to reassess their positions. An example of this tendency appears to be unfolding in a number of government markets with recent short-term rallies petering out and reversals seen late last week.

US 10-year yields found support in the region of the 200-day MA from late October and continue to hold a progression of higher reaction lows. A sustained move below this trend mean would be required to question medium-term supply dominance. UK and Canadian yields have similar patterns while German and Swiss 10-year yields found support today in the region of the 200-day MA. Australian yields continues to lead.

The commonality of supply dominance across major government bond yields suggests investors are positioning themselves for the eventual end of support from the Fed.