The institutions which own Treasuries (e.g. banks) do so with massive amounts of cheap leverage, and those are the only assets they’re allowed to hold with that much leverage.
I’m curious about this. What source of leverage do banks have access to, that cost less than interest on Treasuries? (I know there are retail deposit accounts that pay almost no interest, but I think those are actually pretty expensive for the banks to obtain, because they have to maintain a physical presence to get those customers. I doubt those banks can make a profit if they just put those deposits into Treasuries. You must be talking about something else?)
The money markets are the main direct source of cheap (short-term) liquidity for banks; the relevant interest rates are LIBOR, fed funds, and repo. My current understanding is that retail deposits are ultimately the main source of funds in these markets—some banks (think Bank of America) specialize in retail and net-lend into the overnight money markets, while others net-borrow.
That money goes into Treasuries by default—i.e. whenever banks don’t have anything higher-margin to put it into. That is a profitable activity, to my understanding, at least in the long term. It’s borrowing short-term (overnight) and lending long-term (Treasury term), thereby getting paid to assume interest rate risk, which is exactly the main business of a bank.
In case people want to know more about this stuff, most of my understanding comes from Perry Mehrling’s coursera course (which I recommend), as well as the first third of Stigum’s Money Markets.
I’m curious about this. What source of leverage do banks have access to, that cost less than interest on Treasuries? (I know there are retail deposit accounts that pay almost no interest, but I think those are actually pretty expensive for the banks to obtain, because they have to maintain a physical presence to get those customers. I doubt those banks can make a profit if they just put those deposits into Treasuries. You must be talking about something else?)
The money markets are the main direct source of cheap (short-term) liquidity for banks; the relevant interest rates are LIBOR, fed funds, and repo. My current understanding is that retail deposits are ultimately the main source of funds in these markets—some banks (think Bank of America) specialize in retail and net-lend into the overnight money markets, while others net-borrow.
That money goes into Treasuries by default—i.e. whenever banks don’t have anything higher-margin to put it into. That is a profitable activity, to my understanding, at least in the long term. It’s borrowing short-term (overnight) and lending long-term (Treasury term), thereby getting paid to assume interest rate risk, which is exactly the main business of a bank.
In case people want to know more about this stuff, most of my understanding comes from Perry Mehrling’s coursera course (which I recommend), as well as the first third of Stigum’s Money Markets.
Thanks! I’ve been hoping to come across something like this, to learn about the details of the modern banking system.