The Simplified Bank Stress Test

Bloomberg reported on 20 August 2012 that banks are stepping up their U.S. treasury buying. As deposits increased 3.3% to $US 8.88 trillion in the two months ended July 31 2012, business lending rose 0.7% to $US 7.11 trillion, Federal Reserve data show. This inherently means that banks aren't lending money to the private sector, but are lending their money to the U.S. government. Peter Schiff pointed this out on the Peter Schiff Show of 20 August 2012. Banks bought $US 136.4 billion in bonds (TLT) already this year, pushing their holdings to $US 1.84 trillion.

Let's take a snapshot of the debt maturities in 2011 and 2012 and quickly compare them (Chart 1 and  Chart 2: U.S. treasury debt by Year of Maturity (2012) ) (I talked about debt maturities in this article).

Chart 1: U.S. treasury debt by Year of Maturity (2011)

Chart 3: 10 year U.S. treasury yield 

You can immediately see that short term debt has doubled in 1 year time. The biggest buyers of these treasuries were the federal reserve, domestic investors, banks, emerging markets like Japan and China. It's no wonder that bond yields have gone down with all this buying of U.S. treasuries. But these yields have started to rise sharply just recently, topping 1.85% for the 10 year U.S. treasuries (Chart 3).

If you want to know what impact this will have on the banks, go read the full version of this article.