Bank of America earnings come in better than expected as Wall Street analysts are still penciling in a current recession for the U.S. Yet, the Worst situation is the amount of unrealized losses on commercial bank's balance sheets and the U.S. consumer loading up on debt to paydown higher costs of living. Bond markets could still implode.
Bank of American earnings were less than spectacular, but they beat Wall Street analyst's expectations which are foolishly still calling for a recession here and now. Therefor a rally ensured on the back of interest rates going up for the American consumer, to which the bank has called resilient as they load up on more debt to pay down higher prices. Please refer to Chart 1, with Bank of America share price (bar chart) and the KBW bank index (white line), note the correlation, as the banking sector and Bank of America (BoA) have been equally affected with higher interest rates, volatility and inflation. Also note the Bank of England printing money (buying government and commercial bonds) starting on the 29th Sept and ending on the 11 October, but maintaining their commercial bank backstop till the 11th Nov. Which rallied the KBW index on both occasions.
The yellow and light green lines show total credit for the U.S. consumer and the 30 YR yield at 4.02% which directly affects the mortgage rate, both indicators have surpassed BoA share price and the KBW index, with a divergence that is rather striking.
The less than thrilling rally in bank stocks in light of rates and inflation moving upwards, thus leading to unrealized losses (bonds) on their balance sheets. As bond values and yields run opposite to each other, the higher the yields the less worth the bonds hence the bond write-downs that may have to occur at some point in the near term (refer to Chart 2). And since commercial banks rely on bonds for funding, the BoE experiment of printing money to buy up commercial debt (before a rate rise) in an effort to underwrite and stabilize the bank sector maybe an option for other Central Banks or will it be Governments that may need to to assist the bond/funding market. What ever the case it shows how bad the bond markets have become.
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