According to a recent report by Barron’s, Bank of America Corp. appears to have encountered significant challenges during the first quarter of the year, particularly concerning its Held-to-Maturity (HTM) bonds. It’s estimated that the bank incurred a paper loss of approximately $110 billion on its HTM bonds, representing a notable increase from the $98 billion recorded at the end of the previous year. This steep decline in value underscores the turbulent nature of the bond market, with Bank of America’s substantial $595 billion HTM bond portfolio, primarily composed of mortgage securities, bearing the brunt of the impact.
The adverse performance of Bank of America’s HTM bonds can largely be attributed to the upward trend in bond yields observed during the first quarter. As bond yields rose, the corresponding decline in bond prices led to the devaluation of assets within Bank of America’s HTM portfolio. Given the bank’s strategic decision to hold these assets until maturity without immediate plans for sale, these losses are classified as unrealized, highlighting the paper-based nature of the decline in value.
Interestingly, Bank of America’s estimated unrealized losses on its HTM portfolio surpass those of its counterparts in the banking industry. For instance, JPMorgan Chase & Co. reported $27 billion in paper losses on its HTM portfolio in the fourth quarter. However, JPMorgan Chase has expressed optimism that these unrealized losses may diminish over time as bonds within its portfolio mature or are paid off.
The significance of unrealized losses on HTM bonds gained attention last year following the challenges faced by Silicon Valley Bank, which experienced customer unrest due to declining paper values of its HTM portfolio, ultimately leading to a run on deposits and the bank’s closure. Despite the substantial losses incurred by Bank of America on its HTM portfolio, analysts did not raise significant concerns during the previous quarter.
Looking ahead, the performance of Bank of America’s HTM portfolio is expected to have implications for the bank’s net interest margin, a key metric reflecting the profitability of loans after accounting for interest expenses on deposits. Investors and analysts alike are eagerly awaiting Bank of America’s first-quarter earnings report, scheduled for release on April 16, along with reports from other major financial institutions such as Morgan Stanley and Goldman Sachs Group Inc. This report is anticipated to provide further insights into the bank’s financial performance and the impact of its HTM portfolio on its overall operations and profitability.