Receive free updates on Bank of America Corp news. We’ll send you a myFT Daily Digest email summarizing the latest news every morning. Good morning. This week, we’ve seen strong economic data followed by a bounce in stocks and yields. On Tuesday, it was durable goods orders. Yesterday, it was upwardly revised GDP and falling jobless claims. Based on this trend, we can expect today’s personal consumption spending numbers to be strong as well. The economy is still performing well.
Unhedged will not be publishing on Monday and Tuesday for Independence Day. In the meantime, check out the latest episode of the Unhedged podcast, where Rob and Ethan discuss commercial real estate. A transcript is available for those who prefer written content.
Two years ago, I wrote an article for Unhedged comparing Bank of America and JPMorgan. Both banks had a significant inflow of deposits but decided to use the cash differently. Bank of America invested in mortgage-backed securities and Treasuries, while JPMorgan held onto the cash. BofA’s CEO emphasized that they were not trying to time the market, but rather put the money to work when they were confident. JPMorgan, on the other hand, believed in a robust economic recovery and higher rates, so they chose to hold onto the cash.
Now, two years later, the results of JPMorgan’s decision are evident. Rates have risen, and the cash they held is yielding higher returns than the bonds BofA invested in. As a result, BofA is facing paper losses and criticism from analysts. However, BofA argues that they were not trying to outsmart the bond market and were simply looking for acceptable returns in the prevailing market conditions.
BofA’s problem is not permanent. Their securities portfolio is gradually rolling off, and their yield is slowly increasing. However, in the current situation, BofA’s approach to capital allocation may seem unfavorable. It’s important to remember that banking is a long-term game, and the best risk-adjusted returns are measured over an entire economic cycle.
Overall, BofA’s situation may not be ideal, but it’s important to consider the broader context and the bank’s strategy.
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