(Bloomberg) -- American banks are loading up on U.S. government debt, a sign they remain cautious on the economy even with the jobless rate at a six-year low and corporations at their healthiest in a generation.

Commercial lenders increased their holdings of Treasuries and debt from federal agencies in September by $54 billion to an unprecedented $1.99 trillion, data from the Federal Reserve show. Banks have now been net buyers for 12 straight months.

Bank of America Corp. and Citigroup Inc. are among the lenders adding government bonds this year as loan growth fails to keep up with record deposits and banks prepare for rules that take effect in January requiring them to hold more high-quality assets. While companies in the Standard & Poor’s 500 Index are earning more than ever and carrying the lowest debt burdens in at least 24 years, the buying suggests that loan officers are less sanguine over the outlook for the U.S. economy.

“There’s extra cash the banks have to put to work,” George Goncalves, the head of interest-rate strategy at Nomura Holdings Inc., said by telephone Sept. 29. “It’s not being fully utilized because of less demand, but also the banks have to be much safer,” which is why they’re buying Treasuries.

The banking industry’s appetite for U.S. government bonds has helped Treasuries gain 4.2% this year and pushed down yields on the benchmark 10-year note by more than half a percentage point. The yield was 2.43% at 8:25 a.m. New York time.

DEPOSIT OVERFLOW 

Banks’ holdings of U.S. government debt securities rose last month by the most since 2010, even as Treasuries slumped on deepening concern the Fed would end more than six years of near- zero rates sooner than some investors expected. The 0.6% decline was the biggest monthly loss of 2014.

Futures traders are now pricing in a 52% chance the central bank will increase its target rate in July.

After culling government bonds last year for the first time since 2007, lenders have added almost $180 billion this year, data compiled by Bloomberg show. Banks have stepped up their bond purchases as deposits have ballooned to $10.37 trillion, the most since the Fed data starts in 1973.

Lenders accumulated so much cash that deposits exceeded loans by the most on record last month. That gap has widened by more than $300 billion in the past year.

Bank of America, the second-biggest U.S. bank, has more than quadrupled its available-for-sale holdings of Treasuries and federal agency debt this year to $38.7 billion as of June 30, the latest company filings compiled by Bloomberg show.

BOFA, CITIGROUP 

 

The Charlotte, North Carolina-based lender now holds more of the securities than at any time since 2012.

Citigroup, the New York-based lender that received a $45 billion bailout during the credit crisis, had $103.8 billion of the bonds at the end of June. That’s a 19% increase from December and the highest since March 2011, the data show.

Jerry Dubrowski, a spokesman at Bank of America, declined to comment on the bank’s government bond holdings, as did Mark Costiglio, a spokesman for Citigroup.

“It’s a lack of lending opportunities relative to their capital base,” Paul Miller, a banking analyst at FBR Capital Markets Corp., said in a Oct. 2 phone interview from Arlington, Virginia. “The economy is not growing as fast as it should be, or you would hope it would be in this part of the cycle.”

Since the recession ended in 2009, the growth during the five-year-long expansion has averaged 2.1% annually, slower than each of the last three growth periods since 1982.

Faster growth next year will prod banks into shifting their cash away from government bonds to boost lending, which has taken six years to recover to pre-crisis levels, said Matthew Burnell, a senior banking analyst at Wells Fargo & Co.

LENDING REQUIREMENTS 

A surge in hiring already pushed down the unemployment rate to 5.9% last month, the lowest since July 2008. Employers have added an average 227,000 jobs per month this year, the fastest pace since 1999. The U.S. economy will grow 3% in 2015, the most in a decade, from 2.1% this year, analysts’ estimates compiled by Bloomberg show.

U.S. banks eased lending requirements in the second quarter as demand increased, according to the Fed’s quarterly survey of senior loan officers released in August.

“We expect the banks are going to see stronger loan growth, so more of their liquidity will be going into those types of earning assets,” Burnell said by telephone Oct. 3.

That view is supported by Wall Street prognosticators who foresee weakening demand for Treasuries pushing up yields on the 10-year note to 3.43% by the end of 2015. That’s almost a full percentage higher than where they are today.

BOND DEMAND 

Global banking regulations designed to reduce risk-taking and prevent a repeat of the 2008 crisis that devastated the financial industry suggests lenders will need to keep buying U.S. government bonds for years to come.

Rules approved Sept. 3 by the Fed, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. leave banks about $100 billion short of the $2.5 trillion in easy-to-sell assets that they need to meet the liquidity standard, according to the Fed. Lenders must reach 80% of their liquidity coverage ratios by January and have until the start of 2017 to reach full compliance.

Bank of America alone may need to purchase as much as $65 billion of government debt to become fully compliant, according to report last month from Marty Mosby, a banking analyst at Memphis, Tennessee-based Vining Sparks.

“Regulations are making them a price insensitive buyer of Treasuries,” Priya Misra, Bank of America’s head of U.S. rates strategy, said by telephone Sept. 30. “It’s creating demand.”

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