Major US banks are increasing their investments in collateralized mortgage obligations (CMOs) as a strategy to combat the risk of losing deposits. The demand for CMOs has led to $25 billion in new CMO sales in April, the highest monthly figure in nearly three years. Since the Federal Reserve began raising interest rates in 2022, banks have struggled to retain deposits as higher rates offer stronger returns in other markets. To retain deposits, banks are paying higher rates and reworking their balance sheets by reducing longer-term bonds and increasing investments in shorter-term securities. CMOs, which are backed by government-backed mortgage bonds, are a preferred choice for banks as they have lower risk weights assigned by bank regulators. The CMOs that banks are investing in have floating rates and relatively short durations, providing an opportunity to minimize interest rate risk while delivering attractive yields. Regional banks, in particular, have been focusing on CMOs to manage their balance sheets and combat deposit flight. US banks have lost about $386 billion in deposits since the end of 2021, but have recouped some funds by offering better rates and diversifying deposits across multiple institutions.
In June, the delinquency rate among US office loans rose, driven by increasing vacancies and elevated interest rates. The overall rate of delinquencies on loans behind commercial mortgage-backed securities (CMBS) rose to 2.45% in June from 2.42% in May. Office loans made up 55% of 30-day delinquent loans last month. Three of the largest newly late loans last month were backed by offices, including a $244 million loan behind the Illinois Center and a $120 million loan behind 10 office buildings in Mountain View, California. Office vacancies hit a record 20.1% in the second quarter [d819b021] [20a4d81a] [b0d12262].