Are U.S. bonds really a safe haven?

Banks run the risk of losing money on their hordes of Treasurys.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all RSS FEEDS (close)
Dwight Cass,

( -- It looked like a no-brainer. With a flight to quality last year pushing up U.S. Treasury bond prices and risky loans looking like losses waiting to happen, U.S. banks ploughed money into government bonds. And until about mid-May, when prices of 10-year securities topped 100 cents on the dollar, that looked like a good bet. Now, however, this safe haven isn't looking quite so secure.

A rebound in risk appetite and worries about Uncle Sam's credit rating has drained some air from the Treasury market bubble. A 10-year bond now fetches only a little over 95 cents on the dollar. That may not seem like much of a drop, but if you think of banks leveraging up their positions, it could result in some nasty losses.

How much so? Well, American depository institutions hold some $581 billion in various types of government obligations on reserve with the central bank, according to Federal Reserve statistics.

Of course, the cost of funding these positions has also plummeted. The London interbank offered rate (Libor) for three-month dollar borrowings is now a mere two-thirds of a percent. And a steeper yield curve is a boon for banks looking to earn their way out of trouble through fat net interest margins.

But one could argue that Libor is being artificially depressed by the U.S. government's interventions to prop up bank credit. Should they withdraw those measures -- say, by pulling its borrowing guarantees, its liberal discount window collateral requirements or other programmes -- Libor could easily rise to a level appropriate for the industry's average single-A to double-A credit. That was over 5% in 2006, for example.

Should that happen, and longer rates also struggle higher, banks run the risk of losing money on their hordes of Treasurys, just when their plummeting prices make them hardest to unload. If so, this port in the storm could turn out to be quite choppy. To top of page

Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.