What Rising Treasury Yields Mean for Bank Risk—and Opportunity
4/24/2025

Market volatility isn’t just rattling equity investors—U.S. Treasuries, traditionally considered a safe haven, are in the spotlight too, and it’s creating ripple effects for banks. A spike in long-term yields may offer some upside, but it also introduces a new set of risks for both banks and borrowers.
Volatility hurts on paper—and in practice. As rates rise, the value of banks’ bond holdings—everything from Treasuries and agencies to municipals and corporates—drops. That doesn’t just mean paper losses. “Even unrealized losses … can have negative effects on liquidity and present funding challenges, earnings pressures and, in some cases, issues with capital,” according to the Federal Reserve Bank of St. Louis.
Accounting treatment matters. Losses in securities held to maturity, available –for sale, and held for trading don’t hit the balance sheet the same way due to accounting differences, but the impact is still real—especially at smaller banks. In late 2024, the OCC noted that depreciation in available-for-sale securities was nearly twice as high at banks with under $1 billion in assets.
Credit risk rises with rates. U.S. Treasuries, especially the 10-year U.S. Treasury, are a proxy benchmark for everything else. As yields rise, borrowing costs for consumers and businesses often do too. According to the BBC’s summary of Oxford Economics analyst John Canavan’s views, when investors demand higher returns to lend to the government, rates for riskier lending—like mortgages, credit cards, and business loans—also tend to rise. That creates challenges for repayment, especially among small businesses as debt service requirements become more challenging.
It’s also getting political. U.S. Treasury volatility is now influencing policy. President Trump’s recent decision to pause new tariff rates was reportedly driven in part by fears of a Treasury sell-off and broader market disruption. Analysts are also raising concerns about potential fallout if the president were to attempt to remove Jerome Powell as Fed Chair—a move that could further erode confidence in U.S. monetary policy and debt. President Trump said this week he has “no intention” of firing Powell.
A possible silver lining exists. Banks may benefit from a steepening and normalized yield curve, which can widen the spread between a bank’s short-term funding and its longer-term lending. And with markets looking shakier, risk-averse investors could retreat to insured deposits—creating opportunities for banks to grow their funding base through savings accounts and CDs.
Bottom line: Volatility in Treasuries is both a warning and a window. For risk professionals, the challenge is staying alert to rising exposures—while being ready to seize the upside.