If the world's biggest economy is really on the upswing, thenwhy are America's banks stockpiling a record amount of ultrasafebonds?

After all, jobs are back, the Federal Reserve is close toraising interest rates again and growth has perked up after asluggish first half. But instead of ramping up lending to keep upwith deposits, banks are plowing into U.S. government and relateddebt at the fastest clip since 2014.

The easy answer, of course, has to do with post-crisis financialregulations, which were designed to curb risk-taking and havecompelled banks to hold more high-quality assets. Yet in many ways,the buildup reflects a more worrying sign. In the past year, moreloan officers at large and midsize banks have tightened credit tobusinesses than at any time since 2009, when the U.S. was stillreeling from the housing bust. Americans are also saving morerather than taking on extra debt, damping demand for new loans.

Though it's hard to say whether that means the seven-year-longU.S. expansion may be closer to an end than the upbeat datasuggest, the demand for bonds is welcome news for investorsbuffeted by the biggest monthly selloff since 2010.

“Banks continue to buy Treasuries as we move further through theeconomic cycle,” said Jeff Caughron, chief operating officerat Oklahoma City-based Baker Group, which advises communitybanks with over $45 billion in investments. And there are just“fewer good loans out there to be made.”

That may help contain the backup in Treasury yields as ratesrise and foreign demand slows.

Yields on the U.S. 10-year note have climbed about ahalf-percentage point since falling to an all-time low of 1.318percent in July. They were 1.84 percent Monday morning in London.Losses have accelerated as bonds globally head for their worstmonth in about six years on speculation major central banks aremoving closer to reining in stimulus.

But with banks finding fewer opportunities to lend, it's raisingdeeper questions about the prospects for future economicgrowth.

Commercial banks in the U.S. have amassed $90 billion ofTreasuries and non-mortgage debt from federal agencies this yearalone, bringing the total to $754 billion, according to datacompiled by the Fed. Including federally guaranteed mortgage-backedsecurities, banks now own $2.4 trillion of government bonds, whichwould be the most since the central bank began compiling data in1973.

The five biggest lenders — Wells Fargo &Co., JPMorgan Chase & Co., Bank of America Corp., CitigroupInc. and U.S. Bancorp — held a combined $206billion of government debt at the end of the second quarter,according to the latest available filings. That's a 74 percentincrease over the past three years.

Banks aren't lending more because the economy “isn't growing asfast as we'd like it to grow,” said Paul Miller, a bank analyst atFBR Capital Markets & Co. “Banks are only able to take acertain amount of risk.”

Bank of America, the only big lender to provide supplementaldata on its investments through September, has doubled its“available-for-sale” holdings in government debt to $45 billionover the past six months. AFS excludes securities used in dailytrading and those intended to be held until maturity. Citigroup hasalso increased its exposure in a big way, boosting its holdings to$126 billion at the end of June, the most since at least 1999.

What's more, banking organizations across America have boostedthe stakes they plan to hold to maturity (meaning they can keepthose investments on their books at the price they paid and notworry about market fluctuations) to almost a half-trillion dollarsin the second quarter, based on New York Fed data. At the end of2013, the figure was just $50 billion.

A big reason banks are funneling so much money into safe assetsis that deposit growth is outstripping loan demand. For the biggestlenders, deposits increased by 6.7 percent to $5.2 trillion in thethird quarter from a year earlier, exceeding loan growth by a fullpercentage point.

Few Alternatives

“We have more deposits coming in than we have loans,” BrianMoynihan, Bank of America's CEO, said on the bank's Oct. 17third-quarter earnings call. “We don't take credit risk there, andso we have two alternatives, Treasuries and mortgage-backedsecurities.”

Over the past year, the rate of Bank of America'scommercial-loan growth has fallen from more than 10 percent to lessthan 5 percent. At the same time, consumer lending remainsstagnant, contracting for a 23rd consecutive quarter. Citigroup'sretail loan business has also shrunk, while JPMorgan and WellsFargo, two of the strongest banking franchises in the U.S., haveseen gains in their overall lending slow in recent quarters aswell.

Instead of leaving idle cash parked at the Fed, where its earnsonly 0.5 percent, U.S. government bonds are providing banks anincreasingly attractive spread over what they pay depositors.Two-year Treasury notes yield 0.85 percent, while the averagedeposit rate for interest-bearing checking accounts is 0.31percent, according to Bankrate.com.

For JPMorgan, the gap between yields on two-year U.S. notes andthe bank's average deposit rate has been roughly 0.64 percentagepoint this year, the widest in a decade, data compiled by Bloombergshow.

“Banks need yield wherever they can so this is aninterest-margin story also,” said George Goncalves, the head ofU.S. rates research at Nomura Holdings Inc.

Banks have also become more reluctant to take on too many risksand expose themselves to potential loan losses, especially asgrowth remains lackluster and borrowers seek to reduce theirindebtedness. According to the Fed's quarterly senior loan officersurvey, a majority of large and medium-sized U.S. lenders havetightened lending standards for four straight quarters. That hasn'thappened since 2009, when the U.S. was still struggling to emergefrom the worst economic crisis in seven decades.

Even banks that are faring better have grown more cautious.

“We are being very selective in what loans we make and who wemake one to,” said Thomas Wornham, CEO and president of San DiegoPrivate Bancorp of America, which extended loans at almost twicethe rate of its deposit growth last quarter. “What you are seeingout there is a slowdown.”

Both Ways

To some, that's just how banks should behave, since excessiverisk-taking was exactly what led to the financial crisis.

“It's one of those paradoxes,” said David Keeble, the head offixed-income strategy at Credit Agricole SA. “The Fed probablywants it both ways — they want more lending tokeep the economy going, but more safe lending, which means lesslending.”

Whatever the case, it's clear that while the excess liquidityfrom the Fed's easy-money policies has been a boon for governmentsecurities, banks are still wary of putting much of the cash towork.

“Banks have lots of customer deposits and corporations aren'tspending cash,” said Moorad Choudhry, a professor in the businessschool at University of Kent and the author of more than a dozenbooks on finance including “The Principles of Banking.” “There isnowhere else for banks to put this money.”

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.