Early this week, The Wall Street Journal wrote, "Banks Pile Into Treasurys, Helping to Fund Government Borrowing Spree." The article tells us, "Surging deposits and declining lending are driving banks to dramatically increase their holdings of U.S. Treasurys, offering significant support to the bond market at a time of massive government borrowing.... Larger factors also are helping drag down Treasury yields, which fall when bond prices rise. Inflation has been low for years, investors want a safe place to put their money, and the Federal Reserve has been both buying bonds and promising near-zero short-term interest rates for years to come. Even so, demand from banks and other sources like money-market funds has played a critical role, analysts say, allowing the government to issue more than $3 trillion in debt since February without pushing yields significantly higher, as some had feared. The yield on the benchmark 10-year note settled Friday at 0.694%, down from 1.909% at the end of 2019." The piece continues, "Money-market funds have also received huge inflows as many investors have moved out of riskier investments and into cash. Most of that has gone into government money-market funds, which invest only in Treasurys and other government-backed securities. But managers of prime money-market funds, which can buy a wider range of short-term debt, also have increased their holdings of government debt. Together both types of money-market funds have lifted their holdings of short-term Treasury bills, which carry maturities of up to one year, by more than $1.3 trillion since the end of February." The piece adds, "So much cash flooded into these funds that, for a short time before the Treasury started issuing new debt, yields on Treasury bills actually went negative. Some government money-market funds, such as ones run by Fidelity Investments, stopped taking money from new investors because of concerns about where they could invest it. Blake Gwinn, head of front-end rates strategy at NatWest Markets, said money-market funds' need for short-term bills has helped keep yields in a tight range even as the Treasury began to pump out new bills. These securities made up $2.5 trillion of the $3.3 trillion net Treasury issuance between the end of February and the end of August. Banks and money-market funds have been so important that some have started wondering how the market would respond if either source of demand became less reliable. Bank lending, for example, is expected to increase as the economy improves, likely supplanting some bond purchases. Investors also tend to pull cash from money-market funds once they move on from major market shocks -- a pattern that has shown signs of repeating recently."

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