As banks get ready to wrap up another year and prepare for 2023, planning and budgeting are likely at the top of the to-do list or well underway.  Fed rate moves, inflation affects, a potential recession and the impacts of global headlines are on the minds of most.  While most events can’t be fully predicted, using historical data can assist in planning and strategizing for the new year.

Over the past three years, we have seen rates as high as 4.24% and as low as 0.34% (intraday) on the 10YR Treasury Note. That is a sizeable swing and as portfolio managers we know how our own bond portfolio has transformed, but the average bank portfolio may have performed differently.

Since the Fed started raising the overnight rate:
The average bank bond portfolio picked up 45bps, or ~27%, in bond portfolio earnings and extended the average maturity by 0.67 years.

Year over Year:
The average bank bond portfolio has picked up 49bps, or 31%, in bond portfolio earnings and extended the average maturity by 1.46 years.

Since the beginning of Covid-19 in the US to the time the Fed started raising the overnight rate:
The average bank bond portfolio lost 101bps, or ~40%, in bond portfolio earnings and extended the average maturity by 1.95 years.

Since December 2018 (following the pre-pandemic cycle high on 10YR USTN):
The average bank bond portfolio has lost 46bps, or 18%, in bond portfolio earnings and extended the average maturity by 2.47 years.

Observations:
The average bank bond portfolio had considerable extension at possibly the lows of this interest rate cycle.

Municipals have become the more dominant holding in bank bond portfolios for two reasons: spreads widened out in this sector throughout 2022 and MBS holdings have decreased as banks looked to add more bullet structures. 

Even though the average bank portfolio yield has gone up, it lags considerably when comparing to the 400bps increase in the overnight rate we’ve experienced this year.  New purchases take considerably longer to have an impact on the overall yield of the portfolio, while market valuations impact the gain/loss position and total return immediately.

Banks that are “ahead of peer” may have the following practices:

• More frequent purchasing, less trying to time the market
• Reposition the portfolio through swaps
• Analyze each sector: Muni, MBS, Agencies, CD’s to monitor how spreads are moving with each big shift in the Treasury market
• Use lower yielding holdings (likely purchased in 2020/21) to fund loan growth
• Not afraid of taking losses on short holdings to extend duration and yield while rates hit cycle highs