BoA Faces $100B Bond Losses Amid Rising Yields, Trails JPMorgan

Bank of America faces over $100 billion in unrealized bond losses amid rising yields, impacting its market performance and interest margin.

By Barry Stearns

4/4, 01:33 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
Bank of America Corporation
JP Morgan Chase & Co.

Key Takeaway

  • Bank of America's unrealized bond losses likely surpassed $100 billion, the largest in the banking industry, due to rising yields.
  • The bank's HTM portfolio suffered as 10-year Treasury and mortgage securities yields rose, impacting its tangible common equity.
  • Despite these losses not affecting earnings directly under accounting rules, they have weighed on Bank of America's share price performance compared to JPMorgan Chase.

Rising Bond Yields Impact Bank of America

Bank of America's bond portfolio, primarily consisting of U.S. agency mortgage securities, has seen its unrealized losses likely surpass $100 billion due to rising bond yields in the first quarter and early April. Initially, at the end of 2023, the bank reported $98 billion in paper losses on a $595 billion portfolio. These losses have grown as yields on the 10-year Treasury and mortgage securities increased, with the 10-year Treasury note yield reaching 4.35%, up from 4.20% at the end of the first quarter. Despite these losses, Bank of America has stated it does not plan to sell these assets before maturity, expecting the losses to diminish over time as the bonds mature or are paid off.

Unrealized Losses and Market Reactions

The bank's unrealized losses on its held-to-maturity (HTM) portfolio do not affect its capital or earnings due to accounting rules. However, some investors adjust the bank's capital to reflect these losses, which would significantly reduce the bank's tangible common equity. Bank of America also holds about $270 billion in bonds classified as available for sale (AFS), with a paper loss of $4 billion at year-end 2023. These losses have contributed to the bank's stock underperformance compared to its rival, JPMorgan Chase, with Bank of America shares gaining 11% this year against a 17% rise for JPMorgan.

Comparison with Peers and Portfolio Yield Challenges

Bank of America's unrealized losses on its HTM portfolio are considerably higher than those of its peers, including JPMorgan Chase, which reported a $27 billion unrealized loss at year-end. The bank's overall securities portfolio, mostly classified as HTM, had an average yield of 2.68% at the end of 2023, below current market yields on mortgage securities above 5%. This low yield has affected the bank's interest margin, as deposit costs have risen with short-term interest rates. The bank's net interest margin narrowed in the fourth quarter, contrasting with a wider rate margin reported by JPMorgan.