US banks are facing growing losses on their bond investments as Treasury yields rise. Banks must decide whether to sell bonds worth billions of dollars at a loss or continue holding them and carry the losses on their balance sheets.
Bank of America’s accumulated losses on some investments increased by more than $3 billion in the three months ending September 30, compared with the end of June, Reuters reported. Bank of America reported a sharp increase in its unrealized bond losses.
Brian Mulberry, chief market strategist at Zacks Investment Management, said that if interest rates remain high or long-term Treasury yields rise further, banks could continue facing pressure on their tangible equity and, in some cases, regulatory capital. Higher interest rates could put further pressure on banks’ financial strength.
The dangers of bond losses became clear during the 2023 banking crisis. Silicon Valley Bank collapsed in 2023 after suffering large losses on its bond investments while many customers quickly withdrew their money. Banks have reduced some of their exposure to these risks since the 2023 crisis.
Macrae Sykes, a portfolio manager at Gabelli Funds, said banks could consider accepting losses now and using the money to buy investments that offer higher returns. Over time, these investments could improve cash flow and help banks generate more capital, according to Reuters. Bank executives said they were taking the upcoming capital rules into account while evaluating the bank’s AOCI holdings, according to Reuters.
Some investors believe banks could sell some of their existing bonds and use the money to buy new bonds that offer higher returns. However, the latest increase in Treasury yields shows that investment decisions made years ago can continue to hurt banks when interest rates change. PNC is also considering the impact of Basel III when reviewing its bond losses.
The bank’s losses on bonds that it had not sold reached $109 billion at the end of September, up from $85 billion at the end of June.
Chief Financial Officer Mike Maguire said the bank could sell more securities, but the number of bonds it could realistically sell was limited. Most of these bonds were marked as “held to maturity. This means the bank planned to keep them until they reached their maturity date instead of selling them early. Truist is changing its bond portfolio to manage the impact of interest rates and capital rules.
