The fixed income market has plunged into unprecedented territory, leaving leading financial institutions grappling with a staggering $650 billion in unrealized losses, as reported by Moody's.
This financial quagmire has raised alarms across the industry, signaling that even the stalwarts of Wall Street are reeling from the relentless sell-off in the Treasury market.
In the wake of Silicon Valley Bank's demise earlier this year, due to tumbling bond prices, the question lingers whether further disorder is on the horizon. This bond market debacle has inflicted severe blows to titans such as Bank of America, with share prices tumbling and triggering anxiety over potential reverberations similar to SVB's downfall.
It is essential for wealth advisors and RIAs to digest the implications of these unrealized losses. Treasury bonds, traditionally pillars of stability, have nosedived amid the pandemic, with long-term debt instruments like BlackRock's iShares 20+ Year Treasury fund suffering a staggering 48% drop since April 2020. Correspondingly, yields on 10-year Treasuries have surged, breaching 5%—a level unseen in over a decade and a half.
Unrealized, or 'paper,' losses now loom over the US banking sector's balance sheets, reflecting the diminished valuation of bond portfolios, despite banks opting to retain these assets rather than divest. As of the end of September, these paper losses ballooned by 15% from the end of June, and given the tumultuous trading in October, the situation has arguably intensified.
While these losses remain 'paper' in nature and do not equate to debt, which signifies actual obligations requiring repayment, they have cast a pall over the financial health of institutions. Bank of America has emerged as the most impacted, with a potential $130 billion impact on its financial position.
Its peers, the 'Big Four'—Citigroup, JPMorgan Chase, and Wells Fargo—are also navigating through the headwinds of unrealized losses running into the multibillion-dollar range, as divulged in their latest financial disclosures. The specter of an SVB-like calamity is not unfounded, with SVB's collapse in March, after a $1.8 billion hit to its bond portfolio, precipitating a withdrawal frenzy. The substantial unrealized losses of major banks are likewise sparking trepidation among investors.
However, it's critical to note that these losses have not crystallized. Bank of America, for instance, has not transitioned to actual losses, as it has refrained from liquidating its bond holdings. Bank of America’s CFO, Alastair Borthwick, underscored the resilience of the bank's portfolio during the last earnings call, emphasizing the predominance of low-risk, government-backed securities that they intend to hold to maturity, expecting zero losses over time.
Despite such assurances, the banks cannot overlook the impacts of the Treasury market's upheaval. Research by the Kansas City Fed earlier this year indicated that even unrealized losses could undermine a bank's stock valuation due to deteriorating investor confidence. Throughout the year, bank shares have indeed been under duress. Bank of America's shares have witnessed a 24% decline over the past twelve months and a 14% dip year-to-date.
While the likelihood of these unrealized losses catalyzing another financial crisis remains debated, they continue to cast a shadow over the banking sector. With share prices affected, these losses stand as a pressing concern for the titans of Wall Street, demanding vigilant monitoring and strategic foresight from wealth advisors and RIAs navigating through these turbulent financial waters.
