The graph above shows how Treasury security holdings by the banking sector and the Treasury yield have evolved over the past five years. The red line shows the Treasury and agency securities that commercial banks hold as a share of their total assets since mid-2018. The green line shows the market yield on 10-year Treasury securities over the same period.

This relationship between market yields and bank holdings seems to be divided into three distinct phases:

1. In the period before the pandemic-related recession, which began in February 2020, these lines seem to have a slight inverse relationship: Treasury holdings trended up while the Treasury yield declined.
2. In the two years after the recession began, both lines increased together after a brief initial dip.
3. In the past year, nearly three years since the pandemic recession ended, the inverse relationship reappears, with Treasury holdings trending down and Treasury yields increasing.

One can understand these three phases as an interplay between demand and supply.

Before the pandemic, banks were demanding more Treasuries for their portfolio, and the increase in demand pushed up the price of Treasuries, which in turn depressed the yields. As a result, we see that the red line rose slightly as the green line fell slightly.

During the pandemic, a large amount of Treasury debt was issued to finance the stimulus and spending during the crisis. The issuance of Treasury debt is a large supply shock to the Treasury market. As opposed to the previous period when Treasury demand was driving the yields, there was more Treasury debt than banks (and other potential buyers) were willing to hold at the original price. As a result, the price of Treasury debt went down and the yields rose to entice the banks and other buyers to increase their holdings.

This trend held for nearly two years after the pandemic recession, until demand forces took hold again. In this most-recent period, demand for Treasuries has slowed, which has resulted in lower prices for securities and a faster increase in yields than before.

How this graph was created: Search FRED for “All Commercial Banks Total Assets” and select “Total Assets, All Commercial Banks.” Use the “Edit Graph” button in the upper right corner to open the editing box. Scroll down to “Customize data.” In the text box, search for “Treasury and Agency Securities” and select “Treasury and Agency Securities, All Commercial Banks.” Select “Add” next to the text box. Below this section in “Formula,” enter b/a and select “Apply.” Next, click the gray “ADD LINE” box at the top. In the search box, search for “Market Yield on U.S. Treasury Securities” and select “Market Yield on U.S. Treasury Securities at 1-Year Constant Maturity, Quoted on an Investment Basis.” Below this section in “Formula,” enter a/100 and select “Apply.”

Suggested by Jessie LaBelle and Yu-Ting Chiang.