US banks continued to trim their securities exposure during the first quarter as rising interest rates pushed investment portfolios underwater and put pressure on bank liquidity.

Total securities at US banks were down 4.6% quarter over quarter to $5.611 trillion as of March 31, according to S&P Global Market Intelligence data. The balances peaked during the first quarter of 2022 at $6.260 trillion, up about 49% from the first quarter of 2020, but have since declined for four consecutive quarters, falling 10.4% from their peak.

– Download the data from the charts in this article. – Access securities data for US banks reported in call reports. – Read some of the day's top news and insights from S&P Global Market Intelligence. – Set email alerts for future Data Dispatch articles.

Banks hesitant to invest in medium- to long-term bonds

The Federal Reserve has significantly tightened monetary policy at the fastest pace in 40 years, raising the benchmark fed funds rate by 500 basis points since March 2022. Rising interest rates have pushed bank bond portfolios deeply underwater, adding to pressures on liquidity. On June 14, the Federal Reserve announced it will keep the rates steady within the range of 5% to 5.25%.

Banks have responded to the environment by investing with much greater caution as they seek to preserve their liquidity in the face of higher funding costs and deposit outflows.

Medium-term bonds, or bonds repricing between three to 15 years, declined at a much faster pace during the first quarter, down $150.45 billion, or 8.7%, from Dec. 31, 2022. Long-term bonds, or those with a maturity date of over 15 years, were down 2.6%, while short-term bonds, or bonds maturing in less than three years, fell 1.7%.

The short-term bonds make up 25.4% of the total debt securities as of March 31, the highest concentration since the end of 2020 and up from the low of 21.0% at the end of the second quarter of 2021.

Trend likely to continue for the remainder of the year

While the liquidity concerns may have somewhat cooled down over the last few weeks, banks are unlikely to change their investment strategies in the near term. Lending has slowed but deposits also remain under pressure and banks have responded by deploying cash in more liquid short-term investments.

Securities at commercial banks have declined 5.3% year to date through June 28, according to seasonally adjusted data in the Federal Reserve's most recent H.8 report on bank assets and liabilities. On the other hand, deposits have declined modestly by 2.2% since the start of this year and 1.3% since March 8, just before the collapse of Silicon Valley Bank and Signature Bank. Cash assets are up 11.6% since the year-end and 14.6% since March 8 to $3.482 trillion.