Banks Give Up Hopes of Hikes, Plow Into Long Dated Treasuries and Mortgage-Backed Securities

Banks have become convinced the Fed simply isn't going to hike. So instead of waiting any longer, large banks like Wells Fargo are plowing billions of dollars into longer dated treasuries and agencies.

Simply put, Big US Banks Lose Patience With the Fed

In the years since the crisis the banks have grown used to grappling with higher costs and subdued demand for credit, while keeping plenty of cash and cash-like instruments on hand in the hope of benefiting from an uptick in short-term rates.

But, after the decision from the US Federal Reserve to keep its target overnight rate on hold this month, more lenders are taking their cue from Wells Fargo, the biggest bank in the world by market capitalisation, said analysts.

Over the past year the San Francisco-based bank has run down its cash and short-term investments to buy longer-term assets, on the basis that rates will stay “lower for longer”, according to John Shrewsberry, chief financial officer.

That conviction is now catching, said Jason Goldberg, an analyst at Barclays, which recently hosted representatives from about 150 banks at a conference in New York. “The consensus was: give up on the Fed,” said Mr Goldberg.

n the second quarter, noted Barclays, about half of banks under its coverage reduced their sensitivity to rate rises by converting cash to higher-yielding assets — the highest proportion for more than four years.

Wells Fargo added $50bn of securities to its held-to-maturity investment portfolio over the year to June, according to public filings, with much of it going to Treasuries and bonds issued by Fannie Mae and Freddie Mac, the government-backed mortgage companies. “We’re earning today rather than maintaining all of that sensitivity for the future,” said Mr Shrewsberry, during the bank’s second-quarter results presentation.

“Bankers are starting to say, we can’t run these institutions based on hope for higher rates, so let’s figure out what we can do,” said Fred Cannon, global director of research at Keefe, Bruyette & Woods.

Futures Still Suggest March as First Hike

A quick check on CME FedWatch still shows the first hike in March of 2016. Based on futures prices, it will be an eighth of a point hike at that.

Mike "Mish" Shedlock