The US banking industry is proceeding with caution when it comes to investing in the bond market, even as the Federal Reserve is widely expected to begin cutting rates soon.
During the second quarter, US banks had $5.458 trillion in total securities, down 0.3% from the previous quarter and up 0.4% year over year. Median US government securities concentration continued to decline for the fourth consecutive quarter, to 21.1% as of June 30, down from the peak of 23.7% a year ago. On the other hand, median concentration of residential mortgage-backed securities rose for the fifth consecutive quarter, to 27.5%.
Since 2021, US Treasury securities have declined by $78.13 billion, or 4.8%, to $1.534 trillion at the end of the second quarter, whereas residential mortgage-backed securities are down 15.9%, or by $477.41 billion, to $2.519 trillion.
US banks have reduced their securities balances since the beginning of the Fed's rate hiking campaign, which pushed the industry's bond portfolios deeply underwater. US banks' securities portfolios peaked at $6.26 trillion at the end of the first quarter of 2022 and fell steadily through the end of the third quarter of 2023 as higher rates punished bond values.
The Fed is expected to start cutting rates as soon as its mid-September meeting and reduce rates further by year-end. Even so, banks have been hesitant to deploy much of their liquidity into their securities portfolios, particularly further out on the yield curve.
Short-dated bond concentration falls
Short-term securities — those maturing in three years or less — were down 2.3%, or by $35.91 billion, to $1.530 trillion as of June 30 after rising for three consecutive quarters. The concentration of these short-dated bonds dropped to 28.1% during the quarter, marking the first quarterly decline since the second quarter of 2021, when it was at 21.0%.
Conversely, medium-term bonds — those maturing between three to 15 years — rose 1.3%, or by $18.71 billion, to $1.406 trillion. Longer-dated bonds with a maturity of beyond 15 years remained flat.
Trends at big banks vary
Large banks posted mixed results as they continue to reposition their balance sheets cautiously ahead of potential rate cuts.
Over the last several quarters, banks have sold and let longer-dated securities run off the books while reinvesting the proceeds in higher-yielding short-term cash such as securities or paying down higher-cost borrowings.
Fourteen of the 20 largest US banks by debt securities reduced their exposure to longer-dated bonds, while 10 banks trimmed their short-term debt securities balances.
The nation's largest bank by securities, Bank of America NA, reduced its debt securities balance by 3.6% during the second quarter to $849.72 billion as of June 30. In the previous three quarters, the company added $157.09 billion to its debt securities balance.
Other banks with notable declines in securities balances during the quarter included Truist Bank, Charles Schwab Bank SSB, TD Bank NA and Citibank NA.
JPMorgan Chase Bank NA led the pack with the biggest increase in debt securities, adding $19.33 billion during the quarter.
Securities, deposits rise
Securities at commercial banks were up 4.1% in the year through Aug. 21 and have increased 1.5% since June 26, according to seasonally adjusted data in the Fed's most recent H.8 report on bank assets and liabilities.
Deposits have increased 0.2% since June 26, while loan growth has been muted at 0.3%.