Northern Trust buys $2.4bn of US Treasuries as rate-cut prospects rise

Additions to the 5–10 year portion of AFS book have been, for now, swapped to SOFR

Northern Trust added $2.4 billion worth of US Treasury notes to its book during the first quarter, which it then swapped to floating-rate coupons, in an ostensible bid to both cap duration and retain the opportunity to reap fair-value gains should the Federal Reserve ease monetary policy.

The custodian bank’s available-for-sale (AFS) Treasuries jumped 68.7% to $6.1 billion during the period.

 

The new investments overwhelmingly comprised five- to 10-year notes, which on purchase were swapped to the secured overnight financing rate, a spokesperson told Risk Quantum. This helped keep a lid on the overall AFS book’s duration, which the bank’s chief financial officer quantified at a weighted-average 1.7 years, down from 1.8 years in mid-January.

Bonds backed by US government-sponsored agencies remained the single largest asset class in the AFS book, increasing 6.9% to $12.4 billion. Foreign govies were boosted by 16.3% to $308 million.

Offsetting the buys were a cumulative $783 million of reductions, led by commercial mortgage- and other asset-backed securities. As a whole, AFS securities climbed 11% to $25.6 billion.

 

On the other hand, held-to-maturity bonds, which are valued at amortised cost, slid 10.4% to $23.5 billion as securities matured without being replaced, equivalent to a $2.7 billion reduction.

Of this, around $2 billion stemmed from cuts to non-US govies, which shrank 42.7% to $2.7 billion.

What is it?

A bank’s securities holdings are typically classified in one of three ways. Held-to-maturity securities are those it intends to keep on its books over the long term; trading securities are those it holds for intermediation and plans to sell in the short term; and available-for-sale securities, which occupy a middle ground, meaning they can be either held-to-expiry or sold to pocket gains in value.

AFS and trading securities are marked-to-market, meaning their values fluctuate depending on what a potential buyer is willing to pay for them. HTM securities, in contrast, are accounted for at amortised cost, which generally equals the price the bank paid to acquire them, minus any principal amortisation and discount or premium to face value.

Why it matters

In January, Northern Trust said it had taken action to purge its AFS book of lowest-performing bonds, selling a cumulative $5.3 billion of securities at a loss in two tranches – in November and mid-January. Chief financial officer Jason Tyler said at the time the proceeds were reinvested into shorter-dated securities with a floating rate.

In an update on April 16, Tyler told analysts the bank is now “unlikely” to see another securities book rejig like the last six months’. In this optic, adding to the 5–10 years maturity pocket while swapping them to a short-term rate seems to be a tactical adaptation to strong expectations of an interest rate cut. Should this materialise and bond prices rally, the mark-to-market gains on Northern Trust’s Treasuries may well offset markdowns on the swaps.

Bond price moves in Q1 certainly justified an opportunistic shift in tactics. While the yield gap between five-to-10-year Treasuries and one-year  notes remained negative, it temporarily narrowed around end-January. Northern Trust might have timed its buys around that time, eyeing the time bond valuations rally and yields pare back for good in the wake of a Fed announcement.

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