Bank of America’s Bond Bets Paying Off As Rates Retreat

Samantha Miller

The recent bond market surge has brought solace to Brian Moynihan and Bank of America as it reduces losses on the bank’s massive mortgage securities portfolio.

As of the end of September, the bank’s unrealized losses were a whopping $131 billion, far surpassing the losses of rivals like JPMorgan Chase. Nevertheless, those paper losses have diminished considerably due to the precipitous decline in rates since their high in early November.

According to Barron Compared to where they were just two months ago, Bank of America’s losses are now approximately $100 billion, which is still a huge amount.

Following a loss of more than $40 billion in the previous quarter, JPMorgan is anticipated to incur losses between $30 and $35 billion.

Accounting regulations prevent these unrealized losses from having an impact on capital ratios or profitability, but that hasn’t stopped prominent opponents like Warren Buffett from picking apart Bank of America over them.

Rates Retreat Rescues Bank of America’s Risky Bond Bets

Mortgage securities are especially susceptible to rate increases because of extension risk, which occurs when durations tend to get longer as rates go higher.

As the yield on 10-year Treasuries surged to 5% in October and November, this dynamic ravaged the value of Bank of America’s $603 billion securities portfolio.

The 10-year falling below 4% in the previous six weeks, however, has thrown Moynihan & Co. a lifeline. Paper losses have been reduced by up to $30 billion due to a price rebound of about 5%.

The stock of Bank of America has also been energised by the rise, and it has soared more than 30% since its October highs, when it was nearly 30% off.

With $188 billion in actual equity, a bank with $100 billion in unrealized losses is certainly not insignificant. In a rising-rate environment, these instruments constitute both an overhang and a missed opportunity cost, which the market is cognizant of.

BofA Playing Catchup As Dimon’s Caution Pays Off

Bank of America’s stock has lagged behind its competitors over the last five years, even though it has the highest asset sensitivity ratio in the business. Over the same time period, JPMorgan Chase has returned 14% annually, whereas the bank has only managed 9%.

It now appears that Jamie Dimon’s cautious stance throughout the rate drop of 2020–21 was correct. He forwent substantial yield concessions in order to reduce interest rate risk, forgoing short-term revenue in the process of safeguarding long-term profit margins.

On the other hand, Moynihan was all about the short-term gains, so he gorged himself on assets that only yielded 1-2%. However, the choice resulted in the bank’s portfolio producing only 2.5% yearly, which was going to eat into earnings for quite a while.

Noted by analysts, investors, and even Warren Buffett. The Oracle of Omaha has criticized banks for their heavy holdings of low-yielding mortgage bonds that are extremely sensitive to interest rates, while being cautious not to single out BofA.

BofA’s $10 Billion-Per Quarter Mortgage Bond Grind

Credit risk associated with Bank of America’s holdings is low, to be fair. The portfolio’s component securities pay down at a rate of $10 billion every quarter.

Even at that rate, clearing the decks will take more than five years. Those assets, however, reduce performance as rates rise and cast a long shadow of doubt over Bank of America’s projections.

Investors should start to see an improvement in net interest margins by mid-2024, according to CFO Alastair Borthwick.

If the Federal Reserve is compelled to raise interest rates due to unexpectedly significant inflation, additional losses are probable. The sheer exposure of BofA will continue to be its weak point.

To find out what happens next regarding losses and progress, everyone is waiting for January’s Q4 results report. Since the recent bond reprieve reduced the bank’s paper losses by up to $30 billion, Moynihan can breathe a bit easier for the time being.

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Samantha Miller is a business and finance journalist with over 10 years of experience covering the latest news and trends shaping the corporate landscape. She began her career at The Wall Street Journal, where she reported on major companies and industry developments. Now, Samantha serve as a senior business writer for, profiling influential executives and providing in-depth analysis on business and financial topics.
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