By the Numbers
Lower rates could spur portfolio repositioning from US banks
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Lower interest rates and a narrowing gap between book and market prices on bonds in portfolio could drive US banks to sell some holdings of Treasuries and MBS and go into bonds with shorter duration and higher yield. The most likely bank selling at current rates could affect spreads in Ginnie Mae MBS, specified pools and CMO floaters.
Over the past two years, banks have been both actively and passively rebalancing their portfolios to curtail duration through both outright sales and reinvestment of paydowns into short duration Treasuries and floating-rate MBS. Banks that have executed large outright sales of longer duration MBS have, in many cases, used previously unharvested gains on other assets or on entire lines of business outside the portfolio to offset mark-to-market losses on underwater MBS pass-throughs and CMOs. Large unrealized losses that, if crystalized, would hurt quarterly earnings continue to be the largest deterrent to depository portfolio restructurings. A continued drop in interest rates on the back of rising recessionary concerns should reduce the size of unrealized losses and increase the size and frequency of bank portfolio restructurings.
A look at depositories Available for Sale portfolios.
Large depositories, broadly defined as greater than $50 billion in total assets, held roughly $4.7 trillion in securities, representing 20% of total assets at the end of last year. Securities marked as available for sale (AFS) totaled slightly less than $2.7 trillion or 57% of total holdings. Historically, banks held an overwhelming majority of their securities in AFS as the portfolio would serve as tool to manage interest rate or ‘gap’ risk between asset and liability durations across institutions’ balance sheets. In the wake of the Global Financial Crisis, bank portfolios functioned more as a driver of earnings, as credit contracted and banks held fewer loans on balance sheet. As the size of these portfolios grew and the regulatory regime shifted, the AFS portfolio began to pose a greater risk to equity capital for the largest institutions. In response to this, banks began to move larger swaths of their portfolios to Held to Maturity portfolios.
Looking at the composition of large banks’ AFS portfolios as of December, Treasuries made up nearly 40% of aggregate holdings, totaling just over $1 trillion. Ginnie Mae pass-throughs accounted for an additional $285 billion while conventional pass-throughs added an additional $374 billion. Agency CMOs held in AFS portfolios were $275 billion (Exhibit 1). Comparing the reported cost basis of these holdings to their fair value as of the end of December shows that Treasury holdings were carrying a modest loss of less than 1.0% while unrealized losses in conventional pass-throughs were greater than 10%. Holdings of Ginnie Mae pass-throughs sat at a roughly 6% loss while CMOs carried an unrealized loss of just over 7%.
Exhibit 1: AFS securities balances and marks across large US depositories
Source: Santander US Capital Markets, S&P Capital IQ
While banks do not report portfolio durations, inferences can be made based on other metrics that they do provide, namely repricing data for debt securities. Regulatory filings categorize holdings into three categories: debt securities that reprice within a year, in one to five years or in more than five years. As of December 31, 17% of holdings were in the short duration bucket, 27% were in the intermediate bucket and the remaining 56% in the longer duration bucket. Assigning durations of 0.5 years, 2.5 years and 4.5-years to each of these buckets respectively implies that the overall portfolio duration should be slightly longer than 3-years.
Admittedly, this implied duration has some shortcomings. First this is representative of all holdings and longer duration securities are likely in HTM books and it is not uniform across all cohorts of holdings. However, it is useful to contextualize how much mark-to-market losses may have been pared by the rally in rates between the end of the year and now. Three-year benchmark yields ended the year at 4.27% and currently sit 3.67%, lower by 60 bp, implying a roughly 2% reduction in mark-to-market losses on a 3-year portfolio duration. The implied price move suggests that banks may be able to sell Treasury holdings at a nominal gain and Ginnie Mae pass-through holdings at modest loss while unrealized losses in conventional pass-throughs and agency CMOs may still provide a deterrent to rotating out of these holdings absent a further rally.
Potential reinvestment and implications
Recent widening in the MBS basis and weakness in current coupon Ginnie/Fannie swaps may give banks incentive to add spread and yield while curtailing duration, admittedly at the expense of some negative convexity by selling Treasuries out of the AFS portfolio and adding MBS. Allocations out of Treasuries would likely be into current coupon Ginnie Mae pass-throughs, likely more convex specified pool stories, as depositories would not want to degrade holdings of Level 1 High Quality Liquid Assets or sell the convexity associated with going out of Treasuries into TBA. An uptick in demand for Ginnie Mae MBS from banks should help stem the widening in Ginnie Mae MBS and widen Ginnie/Fannie swap spreads. Proceeds generated from sales of Ginnie Mae pass-throughs could be reinvested into Ginnie Mae floaters, which would likely tighten spreads there and drive pay-ups higher on Ginnie Mae loan balance and other specified pool stories.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2025 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
