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Financial institutions have little incentive to extend loans with unemployment hovering at about 10 percent and the difference between the rate on overnight loans between banks and 10-year Treasuries yields at about 3.5 percentage points. That’s more than double the average of 1.55 percentage points over the past 20 years.
Real yields, which take into account inflation or deflation, are 1.36 percent on 10-year Treasuries, compared with the mean of 2.71 percent the past 20 years, Bloomberg data show. The U.S. economy expanded at a 3.2 percent annual rate in the first quarter and capped the biggest six-month gain since 2003, the Commerce Department reported April 30.
“If you look at the economy you are either glass half full or glass half empty — lenders are the latter right now,” said Keith Leggett, senior economist at the American Bankers Association in Washington. “There isn’t a lot of demand from creditworthy borrowers. You can lead a horse to water but you can’t make him drink. The environment has been made very favorable for borrowing but creditworthy households and businesses are still reluctant to borrow.”
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