Rising rates mean Treasurys are worth less. That's putting pressure on banks

When bonds are paying so much interest right now, investors probably aren’t as excited about old bonds they may have bought last month or last year. That’s because every time yields on Treasurys go up, the value of existing bonds goes down.

Investors who hold those older Treasurys that just aren’t worth as much will suffer the consequences. And banks tend to hold piles of them.

The reason banks buy Treasurys in the first place is because they can’t just lend out all of their depositors’ money.

“You have to have enough of a buffer, to be able to return your depositors money, when they ask for it,” said Dominik Mjartan, CEO of American Pride Bank in Macon, Georgia.

He said banks often invest that “buffer” in Treasurys, because they’re safe, pay some interest, and they’re easy to sell — at least for whatever buyers are willing to pay.

When new bonds start paying more interest, Mjartan said, “the value of my portfolio drops.” That can affect how many loans a bank is comfortable making.

And if that buffer of Treasurys is suddenly worth less? “You’re going to factor that into your appetite to lend. Because you know you have less liquidity that you have available on your balance sheet,” he said.

Higher rates on Treasurys are also starting to make lending out their money less attractive to banks.

“When we balance these things out, does it really make sense to make a loan, or is it better to put it into a Treasury?” said David Reiling, CEO of Sunrise Banks in Minnesota.

He expects higher rates to slow down lending, especially since many borrowers are struggling with inflation.

“As we start to see a little bit of maybe some stress in the credit quality, we’ll have a tendency to be a little bit more conservative, where you know your alternative is a Treasury and you get a pretty decent, risk-free yield,” Reiling said.

Still, banks aren’t planning to load up on new Treasurys, either.

Andrew Silsby, CEO of Kennebec Savings Bank in Augusta, Maine, said he’s reluctant to buy too many Treasurys because rates are so volatile right now

“We might buy a little bit more right now while rates are higher, but you’re just not in the business of trying to predict where interest rates are going,” he said.

After all, today’s bonds could fall in value, too, if rates rise even more.