Bank portfolio shifts from loans to government securities is an important leading indicator. Loans as a rule are more profitable than Treasuries, so banks prefer lending to portfolio investments in government bonds. During the mid-2000s, the above chart shows, bank holdings of Treasury and Agency securities fell marginally while the year-on-year growth rate of commercial and industrial loans soared above 20%. This reversed during the Great Recession.
Now the growth rate of Treasury holdings are crept back above the lending growth rate–a strong indicator of economic weakness.
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