How Will Bank Bond Portfolios Fare in the Second Quarter?
Usually, the No. 1 risk for a bank is credit quality on the loans it originates. But in the banking crisis earlier this year, credit was not the problem. Rather, banks got into trouble because they invested their excess deposits into bonds right before interest rates rose.
Bond yields and Bond values have an inverse relationship, so as yields rose Bond values got crushed. As deposits began to leave the banking system, a few banks found themselves in the uncomfortable position of having to sell bonds while they were trading at a loss to cover deposit outflows. This dynamic ultimately led to the downfall of a few banks earlier this year.
Banks saw the unrealized losses in their bond portfolios decline in the first quarter of the year. Will they do so again when banks report second-quarter earnings this month? Let's take a look.
Source Fool.com
