Big banks reversed a buildup in long-dated bonds over the last two quarters, a reassuring development given recent worries that they might “reach for yield.” Smaller competitors maintained their positions.
Instruments that mature or reprice in more than five years fell 3.8 percentage points from the middle of 2012 to 56.1% of total securities at yearend among holding companies with more than $10 billion of assets, more than undoing increases that had prevailed over the preceding five quarters. (See the following graphic. Interactive controls are described in the captions. Text continues below.)
The data provides a comforting perspective on whether banks are sowing the seeds of the next blowup during a phase of market calm. In particular, concerns over commercial banks have centered on whether managers have sought to boost short-term results while putting the economic futures of their institutions at risk by “reaching for yield” further out on the rate curve.
Profiles of the maturity composition of bond portfolios are far from a clean bill of health, however. The three time categories available in regulatory financial reports (one year or less, more than one year to five years, or more than five years) are broad and imprecise, and do not take derivatives into account.
Moreover, while long-dated securities are at the low end of the range of 54% to 68% of total securities that has prevailed at big holding companies since the end of 2003, companies with $1 billion to $10 billion of assets are at the upper end of the range of 55% to 67% that has prevailed for them over the same time frame. (Only holding companies with shares that trade on public markets are considered here. Institutions for which data was not available across all periods beginning in the fourth quarter of 2003 have been excluded.)
Generally, the picture is similar to the one that emerges from measures of short-term assets and short-term funding: big banks seem to be heavily geared for higher rates compared with small banks. Such “gap” analysis goes beyond holdings of securities to encompass loans and liabilities, but is also crude because it does not consider derivatives, among other shortcomings.
The divide between big banks and small banks can obscure sharply different — and sometimes erratic — positions at individual banks within size categories. (The second tab of the graphic above shows institution-level data on securities maturities and yields at the 234 banks considered here.)
Among the Big Four, JPMorgan Chase (JPM) cut its allocation to long-dated bonds substantially in the fourth quarter, while Bank of America (BAC) continued to report high overall levels of long-dated bonds.
Among smaller banks, First Midwest Bancorp (FMBI) slashed its exposure to long-dated bonds in 2011, rotating mostly into the one-to-five-year category.