Banks Place More Chips on Long-Dated Securities: Interactive Graphic

The sell-off in Treasuries that extended through much of this month underscores the dangers of adding exposure to long-dated bonds to pad yields on securities portfolios.

But, with continuing weakness in economic reports, no resolution to the European crisis and the Federal Reserve’s promise to keep rates low far into the future, both large and small banks have been doing just that in recent quarters, if only by a bit. (The graphic below shows aggregate maturity profiles for large and small institutions in the first tab, and maturity profiles and portfolio yields for individual holding companies with more than $1 billion in assets in the second tab. Interactive controls are described in the captions. Text continues below.)

Since a recent low in the first quarter of 2011, bonds that reprice or mature in more than five years have increased by about 2 percentage points as a portion of total securities at holding companies with more than $10 billion of assets, to 59% in the second quarter this year.

At holding companies with $1 billion to $10 billion of assets, such bonds increased about 1 percentage point to 67% during the same time. (This analysis covers top-tier holding companies whose shares trade on public markets, and excludes institutions for which data was not available across all periods beginning in the fourth quarter of 2003.)

Taking the longer view, however, the weighting of long-dated investments at large holding companies is currently at the low end of the range of roughly 60% to 70% of total securities that has prevailed for most of the last 10 years.

Large holding companies’ exposure peaked in 2007 as the Fed pivoted away from a tightening phase. Their investment in bonds that mature or reprice in one year to five years has filled most of the gap, rising about 7 percentage points from 2007 to 21% of total securities in the second quarter this year.

Meanwhile, holding companies with $1 billion to $10 billion of assets have maintained relatively heavy positions in long-dated bonds since 2008 – in the range of 64% to 67% of total securities, compared with a range of 56% to 60% in the two years leading up to the recession.

In a midyear risk review, the Office of the Comptroller of the Currency said that while national banks had generally trimmed the duration of their securities portfolios over the past few years, small national banks had gone in the opposite direction, a transition that could make them vulnerable “to potentially significant interest rate risk if rates were to rise rapidly as occurred in 1994.”

To be sure, individual institutions frequently break with the aggregate trends. Long-dated instruments have plummeted recently as a percentage of total securities at the $8.1 billion-asset First Midwest Bancorp (FMBI) in Itasca, Ill., for instance, while they have climbed at the $117.5 billion-asset Fifth Third Bancorp (FITB) in Cincinnati.

Moreover, the securities figures are an imprecise read on a bank’s actual interest rate positioning, failing to capture offsetting derivatives, for instance, or the structure of larger loan and funding portfolios.

And where interest rate risk is mild, other forms of risk may rear up: a conservative duration profile at JPMorgan Chase (JPM) did not prevent the company’s disastrous bets on credit derivatives.