The Big Idea

Bank investing during wartime

Steven Abrahams | May 16, 2025

This material is a Marketing Communication and does not constitute Independent Investment Research.

While the outbreak of tariff war in April left many corporate and institutional investment decisions on hold, banks seemed to step into the breach. Credit provided through bank securities purchases and loans suddenly accelerated. Not all securities or borrowers got the same treatment. There were favorites. But banks have served as a stabilizing force so far in this disruption. What a difference a decade or so makes.

Bank credit: all securities and loans

If uncertainty over tariffs forced corporations and institutional portfolios to put major investments on hold, it did not seem to have that effect on banks. The aggregate extension of bank credit through loans and securities had expanded through March at an annualized monthly rate just above 3% (Exhibit 1). But by the end of April, growth in credit had accelerated to nearly 4.7%. Bank credit in April expanded by $190 billion. But not all credit expanded equally. In both securities and loans, a single category in each led the way.

Exhibit 1: Extension of bank credit—securities and loans—accelerated in April

Source: Federal Reserve H.8, Santander US Capital Markets

Securities

In securities, banks shifted their purchases sharply after April’s Liberation Day, adding Treasury debt at the fastest monthly pace in at least a year. Annualized monthly growth in bank Treasury holdings started April at 7.3% and ended at 51% (Exhibit 2). That amounted to a $76 billion bump in Treasury holdings. ABS grew by a much more tepid annualized 5.7%, adding $4.2 billion. MBS slid by an annualized 3.4%, balances there falling after Liberation Day by $7.5 billion.

Exhibit 2: Banks’ marginal holdings of Treasury debt jumped in April

Source: Federal Reserve H.8, Santander US Capital Markets

Some mix of higher yields, liquidity, zero risk-weighting and spread over the SOFR swap curve likely drew the strong bank Treasury bid. Banks could have bought a 5-year Treasury note and used a SOFR swap to turn it into a SOFR + 38 bp asset, for example, or bought 10-year note and swapped it into SOFR + 53 bp. April offered the best swap levels of the year.

April’s higher rates also may have made banks cautious on MBS. The collapse of Silicon Valley Bank and Signature Bank in March 2023 have left many of their former peers reluctant to take negative convexity. That has increased bank use of CMOs, which would be difficult if not impossible to scale at the same pace as Treasuries.

Banks have loaded up on Treasury exposure over the last 12 months at the fastest pace of any earning asset—either securities or loans. Treasury balances finished April at $1.86 trillion, up 15% from a year ago. MBS balances finished at $2.68 trillion, up from a year ago by a more modest 5.3%. And ABS finished at $893 billion, down from a year ago by 1%.

In general, securities continued to grow through April as a share of banks’ credit book—securities and loans. Securities’ share has been rising since late 2023, rebounding from an earlier drop after a combination of higher interest rates and the negative convexity of MBS left significant unrealized losses on the balance sheet (Exhibit 3). Through hedging of assets such as agency CMBS and purchases of capped floating-rate CMOs, banks have rebuilt some of their positions.

Exhibit 3: Banks continue to rebuild securities’ share of earning assets

Source: Federal Reserve H.8, Santander US Capital Markets

Loans

On the lending side—the other 70% of the credit book—banks kept the cash flowing despite the uncertainty in April, especially loans to portfolios of private debt. The balances of loans to non-depository financial institutions such as mortgage banks, online lenders and private equity along with loans not classified elsewhere started April growing at an annualized 17.9% and ended at 30.9% (Exhibit 4). Those balances rose by nearly $61 billion. Consumer lending also picked up, starting April growing at an annualized 4.8% and ending at 9.2%. Those balances rose by nearly $17 billion. Other forms of lending—C&I, mortgage loans, and commercial real estate—continued to grow roughly at their earlier pace through April

Exhibit 4: All lending, especially to portfolios of private debt, grew through April

Note: Other loans include loans to non-depository financial institutions and loans not elsewhere classified.
Source: Federal Reserve H.8, Santander US Capital Markets

It is hard to know what prompted the faster growth in lending to private debt portfolios and to consumers. Many companies anecdotally have suspended major investments and presumably would not need new debt. But it is possible after the April 9 pause in tariffs that some corporate and individual borrowers decided to accelerate purchases of imported goods and needed credit for the purchases.

The April growth in loans to non-depository financial institutions and other borrowers continued a year-long trend that has made this lending category the fastest growing one among commercial banks. Through April, it was up 14% year-over-year and now tallies $2.4 trillion, not far behind commercial real estate loans ($3.0 trillion), C&I ($2.8 trillion) and residential real estate ($2.6 trillion) and ahead of consumer ($1.9 trillion).

Reallocation away from cash assets and into securities and loans

With the credit book rising $190 billion, it raises the question of where the cash came from for the investments, and it look like it came from reserves. The cash category on the balance sheet, which is vault cash and a few other things but mainly reserves at the Fed, fell after Liberation Day at an annualized monthly rate of nearly 114% (Exhibit 5). In absolute terms, that was down $321 billion, more than enough to cover a reallocation to the credit book. Of course, those balances could also reflect the impact of April tax payments by bank customers. Balances held in cash assets can be volatile since that category usually changes to meet needs elsewhere on the balance sheet. April was a case in point.

Exhibit 5: Cash assets, mainly reserves, dropped sharply after Liberation Day

Source: Federal Reserve H.8, Santander US Capital Markets

The Big Picture

The Big Picture from April was that banks seemed to step in and provide liquidity to both the Treasury market and, indirectly, to private lenders and consumers. At least in the April episode of tariff wars, banks seemed to have played a stabilizing role. Things clearly have come a long way since 2008.

* * *

The view in rates

The market closed on Friday pricing fed funds at 3.81% to end the year, less than 7 bp below the Fed’s March dots. The steady reversal over the last few weeks of market expectations for cuts this year likely reflects a series of messages from Fed speakers about the risk of inflation from tariffs. The Fed looks prepared to wait until it has a better view of whether tariffs will bring a 1-time price change or more persistent inflation.

Moody’s downgrade of the US from ‘AAA’ to ‘Aa1’ on Friday will almost certainly get more investors focused on US fiscal policy and debt. Debt-to-GDP is at 100% and expected to grow over the next decade to 117%. The budget bill moving through Congress could push it higher. That promises to add term premium to the yield curve, steepening the curve.

Other key market levels:

Fed RRP balances closed at $137 billion as of Friday, down on $5 billion in the last week
Setting on 3-month term SOFR closed Friday at 432 bp, up 2 bp in the last week
Further out the curve, the 2-year note traded Friday at 4.00%, up 11 bp in the last week. The 10-year note traded at 4.48%, up 10 bp in the last week.
The Treasury yield curve traded Friday with 2s10s at 48 bp, flatter by 1 bp in the last week. The 5s30s traded Friday at 85 bp, steeper by 2 bp over the same period
Breakeven 10-year inflation traded Friday at 236 bp, up 5 bp in the last week. The 10-year real rate finished the week at 211 bp, up 5 bp in the last week.

The view in spreads

Moody’s downgrade of the US could push credit spreads out slightly, but that should quickly take a back seat to developments in tariffs. The de-escalation by the US and China a week ago has taken significant risk out of the market by showing China’s willingness to talk and possibly compromise. There is still significant risk of escalation with other trading counterparties, but China is a big one. That explains the tightening in risk spreads in the last week. The Bloomberg US investment grade corporate bond index OAS traded on Friday at 90 bp, tighter by 9 bp in the last week. Nominal par 30-year MBS spreads to the blend of 5- and 10-year Treasury yields traded Friday at 149 bp, tighter by 3 bp in the last week. Par 30-year MBS TOAS closed Friday at 34 bp, wider by 1 bp in the last week.

The view in credit

Tariffs should weaken most credits assuming slower growth, and hit specific credits hard based on exposure to cross-border trade flows. Excess returns from the first week of tariff war point to the specific sectors more or less exposed to tariff. We have been watching cracks in credit quality at the weaker end of the credit distribution for months. Fundamentals for the average of the distribution continue to look stable. Most investment grade corporate and most consumer balance sheets have fixed-rate funding so falling rates have limited immediate effect. Consumer debt service coverage is roughly at 2019 levels. However, serious delinquencies in FHA mortgages and in credit cards held by consumers with the lowest credit scores have been accelerating. Consumers in the lowest tier of income look vulnerable. The balance sheets of smaller companies show signs of rising leverage and lower operating margins. Leveraged loans also are showing signs of stress, with the combination of payment defaults and liability management exercises, or LMEs, often pursued instead of bankruptcy, back to 2020 post-Covid peaks. If the Fed only eases slowly this year, fewer leveraged companies will be able to outrun interest rates, and signs of stress should increase. LMEs are very opaque transactions, so a material increase could make important parts of the leveraged loan market hard to evaluate.

Steven Abrahams
steven.abrahams@santander.us
1 (646) 776-7864

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