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They don't need to sell if they hold to maturity, at which point they'll get their investment paid back in full. Their only "loss" is the opportunity cost of no
by Denvercoder9 3y ago
They don't need to sell if they hold to maturity, at which point they'll get their investment paid back in full. Their only "loss" is the opportunity cost of not having been able to hold better-yielding bonds, but that's not a loss in an accounting or practical sense.
- userinanother 3y agoIt’s a practical loss but accounting rules say you don’t have to acknowledge it. A bank makes money by making loans and deals with its working capital. If you have half the working capital you did before because the rest is locked in to an increasingly unfavorable position you have a problem. Also when you think of a bank share as a percentage of the value of the company you basically have half the value you did before. The stock basically reflects that.
- RandomLensman 3y agoAt some point the bonds will start to show gains again because they will moves towards par - the position is not increasingly unfavorable as such.
- userinanother 3y agoThis is true but until then they are paying 4-5% on money that they are earning 2-3% on so it’s at the very least working against current profits
- RandomLensman 3y agoI haven't looked at how those positions are funded or hedged. While negative carry is possible, they could haved swapped the coupons back to float when they established the positions or have some more congruent term funding for some - I don't know.
- state_less 3y agoYou’ll get the expected return but if inflation is 2-4% and if you’re holding bonds yielding 1% over 30 years, the real returns will be -1% to -3% per year. So you’ll have taken a real loss in purchasing power even if you’re paid in full.
- RandomLensman 3y agoBanks tend to be run in nominal space.