Banks Pull Back on Long-Term Bond Buys; HVCRE Loan Exposure Ticks Up

It is always disheartening to me when I see that bankers stop buying securities as the yields rise.   The best and brightest bankers buy the largest portion of bonds with longer durations at higher interest rates and the smallest portion with the shortest durations when interest rates are low.  It takes a lot of discipline, but it can be done (especially the duration part).

Early in my career I discovered the pain of chasing yields and experiencing bond losses when economic conditions push interest rates up.  It was then and there that I decided that every future purchase I made would be scenario tested so that I knew the total return over the life of that bond given various interest rate scenarios.  No one has a crystal ball and I certainly didn't predict that rates would rise as much as they have this fast so far in 2022.  However, it was clear a year ago that inflation would become dominant and negative real interest rates would cause interest rates to rise.  So, I have a hard time understanding if more long-term bonds were purchased in 2021 than 2022 given the intrinsic value of bonds today versus 12-months ago.

That said, I clearly remember being told by senior management that I could not buy 10-year 10% yielding treasury notes at the time of the Gulf war because it was too risky.  Everyone knows how that worked out.  I hope this helps some bankers who are currently overwhelmed by the anxiety associated with today's unrealized losses!

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Neil Stanley
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Original Message:
Sent: 09-21-2022 12:17
From: Rob Blackwell
Subject: Banks Pull Back on Long-Term Bond Buys; HVCRE Loan Exposure Ticks Up

This week we've got two posts from S&P Global Market Intelligence. The first discusses how banks' bond holdings fell 1.8% in the second quarter as inflation and tighter monetary policy pressured liquidity. The drop was largely due to fewer purchases of long-term bonds; securities expected to mature or reprice in three years or less actually rose 2.5%. Meanwhile, deposits fell 1.9% in the second quarter, and loans grew 3.7%. The second post discusses how banks' exposure to high-volatility commercial real estate loans increased to its highest level in a year during the same period.

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Rob Blackwell
Chief Content Officer and Head of External Affairs
IntraFi
Arlington, VA
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