The Blubber

The sharp increase in interest rates since the end of the third quarter has expanded losses on bank securities portfolios, a trend that could draw investor scrutiny as banks begin reporting fourth-quarter results next week.

Bank of America, which holds the largest unrealized losses in the banking industry, may attract particular attention from investors.

According to Barron’s estimates, Bank of America’s unrealized losses on its $568 billion bond portfolio—comprised largely of U.S. agency mortgage securities—could swell to $111 billion or more, compared to $86 billion at the end of September.

Across the industry, unrealized losses could exceed $500 billion, up from $364 billion at the close of the third quarter. These figures encompass all banks insured by the FDIC. Despite the recent increases, the total potential losses remain below the nearly $700 billion recorded at the end of the third quarter in 2022. Bank of America is set to release its earnings on January 16.

The rise in losses stems from the inverse relationship between bond prices and yields.

During the fourth quarter, the yield on the 10-year Treasury note climbed by approximately three-quarters of a percentage point, ending the year at 4.57%. Since then, it has risen further to 4.67%. Yields on mortgage securities have also surged, reducing the value of bank portfolios heavily invested in these assets.