Banks sell Treasuries as ease in liquidity rules seen: report

(Reuters) - Large U.S.-based banks have sold U.S. Treasuries at the fastest rate since 2009 over the past month, possibly on expectations that rules requiring them to hold high-quality assets will be relaxed, TD Securities said in a report on Friday.

The amount of U.S. government bonds held by banks declined by $39 billion in the past four weeks, after the U.S. Treasury Department on June 12 released suggested changes to banking rules that included clarifying the amount of capital buffers banks need to protect against negative events.

That was a faster pace than previous declines in the banks’ bond holdings. Their Treasury holdings have declined by $59 billion in total this year, compared with an increase of $69 billion in mortgage-backed securities (MBS), TD said.

“We believe the report’s proposed easing of…regulations may have incentivised banks to shed some level 1 high quality liquid assets,” which includes Treasuries, TD analysts said in the report.

An alternative explanation for the shift out of Treasuries, and into mortgage-backed debt, may be that banks are seeking out higher yielding assets, TD said.

TD noted that large domestic banks have accounted for 75 percent of selling in Treasuries this year, after being the largest buyers of the debt in 2014 when the Liquidity Coverage Ratio (LCR) rules was introduced.

The LCR rules govern how many liquid assets financial companies need to hold to protect against future shocks.

The White House also said on Monday that U.S. President Donald Trump planned to nominate former Treasury official Randal Quarles to be the Federal Reserve’s top banking regulator, adding to the view that banks will face fewer liquidity constraints.

Quarles is viewed as an industry-friendly figure who will likely listen to banks that have complained about the impact of regulations implemented since the financial crisis of 2007-2009.

Reporting by Karen Brettell; Editing by Andrew Hay