Wednesday, 11 December 2013

U.S. Money, Credit & Treasuries Review (as of 27 November 2013)

The U.S. monetary base (base money) increased USD 25.6 billion for the bi-weekly period ending 27 November 2013 according to the most recent monetary statistics released by the Federal Reserve. At USD 3.7116 trillion it was the highest monetary base ever reported. The base has now increased more than USD 1 trillion, or 37.9%, this year alone as the Fed continues its QE program buying USD 85 billion every month of longer term treasury securities and agency mortgage-backed securities first announced at the tag end of 2012.
The 1-year growth rate for M1 money supply fell to 7.9% for the most recent bi-weekly period, the lowest reported for more than two years (it was 5.5% for the bi-weekly period ending 3 November 2011). This was 2.8 percentage points lower than the 10.7% average during the last 52 weeks.

The 1-year growth rate in the M2 money supply increased slightly during the last two weeks, from 5.9% to 6.2%. This was 80 basis points lower than the 52 week average. The drop in the growth rate in the M2 resembles the drop in the growth rate for M1, though the latter peaked earlier. More specifically, the 1-year growth rate in the M1 peaked at 22.4% in early October 2011 while the M2 peaked at 10.6% around mid January 2011. Since these previous peaks, the 1-year growth rates in the M1 and M2 have dropped around 65% and 42%, respectively.
Bank Credit growth continues to be extremely low compared to historical averages. Though the 1-year growth rate increased about 20 basis points compared to two weeks ago, the current growth rate of 1.7% is 4.8 percentage points, or 70%, lower than the long term average of 6.5% since 1985. Moreover, the current total bank credit outstanding of USD 10.0901 trillion is up only 1.23% in total since the end of 2012. Excluding various stages during the 2009 to 2011 period, such low year on year growth rates in bank credit are extraordinary. In fact, going all the way back to the beginning of the data series reported by the Fed, which commences in 1974, the year on year (YoY) growth rates in bank credit has never been as low at it currently is (except for stages during the 2009-2011 period mentioned above).

Total Loans and Leases, which currently makes up 73.2% of Bank Credit (the average is 74.8% since 1985), is also growing very slowly. At 2.4%, the current YoY growth rate of 2.4% is more than 62% lower than the 6.4% average since 1985. Though the growth rate in Loans and Leases fluctuates considerably more than Bank Credit, rarely does it hit the low growth rates we've seen during the second half of this year. If we again exclude the 2009 to 2011 period, the current growth rate is historically low and has only appeared a few times before since 1974: 1975-1976, 1991-1993 and 2001-2002.

Now, commercial banks are expanding their assets, but they're not doing it through increasing lending or investing. Instead, bank assets are growing through accumulating cash balances which are up by 53.6% this year as of end of November and now represents 18.74% of total assets, almost three times higher than the 6.84% average since 1985. Since the end of 2007, banks cash asset have grown from USD 327.1 billion to the current USD 2.6282 trillion (week ending 27 Nov 2013), an increase of more than eight times compared to what it was less than six years ago. During the same period, Bank Credit and Loans and Leases only increased 1.13 and 1.07 times, respectively.
Compared to two weeks ago, the 1- and 10-year treasury yields as of yesterday was up by 1 and 7 basis points, respectively. As a result, the spread between the two increased  by 6 basis points. Compared to one year ago, the 1-year yield is down by 4 basis points, the 10-year yield is up 119 basis points and the spread has widened by 123 basis points. While both yields remain substantially lower than the averages since 1984, the current spread of 2.67% is 119 basis points higher than the 1.48% average for the same period.

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