The losses, which totaled about $106 billion at the end of the second quarter, could have widened by over $10 billion in the current quarter.
Bank of America’s big bond losses likely widened in the current quarter due to a sharp increase in market interest rates.
Our estimate is based on an increase of more than one-half percentage point in the 10-year Treasury yield to about 4.5% in the current quarter. Rising rates have translated into a decline of about 3% in the value of agency mortgage securities, which account for the bulk of Bank of America’s portfolio.BofA’s losses are in a “held to maturity” portfolio, whose holdings, as the name suggests, are unlikely to be sold.
The losses appear to have weighed on BofA’s stock, which is down 18%, to $27.31, so far this year, the worst showing among its peers. JPMorgan shares, at around $145, are up 8.6% in 2023, while Wells Fargo is off just 1%. Rival JPMorgan didn’t take this view. CEO Jamie Dimon told investors on an earnings conference call in late 2020 that the bank wouldn’t load up on bonds: “We’re going to make long-term decisions for the company. And if your NII [net interest income] in the end gets squeezed a little bit, so be it. But we don’t want to be in a position where we lose a lot of money because we made investments in five- or 10-year securities which will lose a lot if rates go up.
Bank of America executives have said the held-to-maturity portfolio, mostly agency mortgage securities with minimal credit risk, will ultimately mature and that the losses will melt away over time. Principal payments are running at about $10 billion per quarter. The overall portfolio has a weighted average life of about eight years.
The BofA portfolio, however, may be weighing on the bank’s interest margins as deposit costs continue to increase.
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