U.S. banks weigh bond portfolio sales as Treasury yields pressure capital

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U.S. banks weigh bond sales

Highlights

U.S. banks face deepening unrealized bond losses, with industry AOCI at negative $156.64 billion in Q2 and worsening after a sharp Q3 rise in 10-year Treasury yields.
Bank of America's unrealized losses on bond holdings jumped to $109 billion by September 30 from $85 billion in June, mostly in held-to-maturity securities.
Fifth Third delayed a September share repurchase due to AOCI impact from rising rates, while Wells Fargo and PNC tie future buybacks to both rates and Basel III capital rules.

Portfolio decisions sharpen as losses deepen

As reported by Reuters, the latest rise in Treasury yields is intensifying pressure on banks that built up large securities portfolios when interest rates were lower. Selling those bonds would lock in immediate losses, while continuing to hold them keeps unrealized losses on balance sheets and can constrain some measures of financial strength.

Banks reflect changes in the value of securities they may sell before maturity through accumulated other comprehensive income, or AOCI. S&P Global Market Intelligence data shows the industry's AOCI balance remains deeply negative at $156.64 billion in the second quarter, even after improving from 2023 levels.

The pressure may have increased further after the 10-year U.S. Treasury yield posted its sharpest rise since 1994 in the third quarter. Because bond prices move inversely to yields, that move is likely to deepen unrealized losses across bank portfolios.

Bank of America's accumulated other comprehensive loss increased by more than $3 billion in the three months ended September 30 from the end of June. Its unrealized losses on bond holdings reached $109 billion at the end of September, up from $85 billion at the end of June, with most of those securities classified as held to maturity and not intended for sale.

Investors and strategists say some lenders may still decide that taking losses now could improve future returns if proceeds are reinvested at higher yields. At the same time, the issue remains sensitive after Silicon Valley Bank's 2023 collapse showed how bond losses can become far more damaging when paired with fast deposit outflows.

Capital rules and buybacks add pressure

Higher rates are already influencing how banks think about returning capital to shareholders. Fifth Third said it delayed a planned share repurchase in September after a sharp move in interest rates affected its AOCI, while Wells Fargo said future buybacks may depend in part on how rates shape the value of its investments.

Truist is also repositioning its securities portfolio, with finance chief Mike Maguire saying the bank still sees room for additional sales, although the pool of bonds that can be acted on is limited. He said the approaching Basel III framework makes it sensible to take action around the securities portfolio.

PNC executives likewise said the bank is considering Basel III capital rules as it evaluates its AOCI holdings. The international framework could further shape how lenders manage investments and how much capital they can return to shareholders, adding another layer of complexity to decisions that are already becoming more urgent as yields remain elevated.

Our earlier article on rising long-term U.S. Treasury yields explained how borrowing costs above 5% were amplifying strain across the economy—pushing up mortgage rates and raising the federal government’s interest burden as deficits near $2 trillion. It also noted that persistent heavy issuance and limited prospects for near-term fiscal compromise could keep financing conditions tighter for longer, even if higher yields continue to attract investors.

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