Key facts
- US banks face a dilemma over bond portfolio losses due to rising Treasury yields.
- Unrealized losses on bond portfolios can weaken financial strength and limit shareholder payouts.
- The industry's AOCI balance was $156.64 billion negative in the second quarter.
- Bank of America's unrealized bond losses rose to $109 billion by end-September.
- Fifth Third delayed a share repurchase due to interest rate impacts on AOCI.
US banks are facing a critical decision regarding their bond portfolios as Treasury yields have surged, creating significant unrealized losses. Selling these bonds would mean realizing an immediate financial hit, while holding them could prolong the losses, impacting financial strength and potentially limiting shareholder payouts. The industry's accumulated other comprehensive income (AOCI) balance remained deeply negative at $156.64 billion in the second quarter. The 10-year US Treasury yield experienced its sharpest rise since 1994 in the third quarter, exacerbating these losses. For instance, Bank of America's unrealized losses on its bond portfolio increased to $109 billion by the end of September from $85 billion at the end of June. Experts suggest that taking a loss to redeploy capital at higher yields could be beneficial in the long run, provided the higher yield can recoup the loss within a reasonable timeframe. The risks associated with bond portfolios are not hypothetical, as deep losses on investments, combined with deposit withdrawals, contributed to the collapse of Silicon Valley Bank in 2023. The impact is already being felt in capital return plans, with Fifth Third delaying a share repurchase and Wells Fargo indicating future buybacks may be influenced by interest rate impacts on investments. Truist has been repositioning its securities portfolio, and both Truist and PNC are factoring in upcoming Basel III capital rules when evaluating their AOCI holdings.