October 20, 2026 | Read online

Your Index Fund Owns This Bank's Mess

The bond hole grew three times faster than the bank made money.

Key Points:

Rate Paradox: 10-year yield above 5% boosts net interest income 8% -> same yield spike inflates HTM unrealized losses to $109B -> CET1 cushion narrows to 90 basis points above the 10.0% regulatory floor.
Hidden Leverage: Bank of America's $109 billion in unrealized bond losses now equal roughly 55% of its $198 billion in CET1 capital, up from 40% at year-end 2025.
Capital Threshold: If the 10-year yield holds above 5% through Q4 2026, the CET1 ratio could fall below 10.5%, the level that historically triggers pullbacks in buybacks and constrains dividend growth.
Volume Spike: BAC traded 115.1 million shares on October 14, a 207% increase over its three-month average, and the stock closed down 4.8% at $51.39.

Bank of America earned $6.9 billion last quarter. In those same ninety days, the paper loss on its bond portfolio grew by $24 billion. The hole grew three times faster than the bank made money.

If you own an index fund, you own this bank. BAC is the fifth largest holding in XLF. It sits inside SPY, VOO, and VTI. It lives in nearly every balanced fund and managed account we own. I don't think most people realize how deep this problem sits inside their own portfolios.

BofA loaded up on long-term bonds when rates were near zero. Treasuries. Mortgage-backed securities. About $496 billion worth at cost. That portfolio still yields about 2%. The 10-year Treasury now yields over 5%. The gap between the two created $109 billion in paper losses. But the bank labels those bonds "held to maturity." So the losses never show up in earnings. They sit in a footnote. Invisible. Until it isn't.

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Invisible does not mean harmless. I can't stop thinking about this. Wall Street says higher rates are good for BofA. More income from lending. And that part is true. Net interest income rose 8% year over year to $16.6 billion. Analysts see it climbing into 2027. But the same rising rates that boost income are widening the bond hole. The cure and the disease are the same thing. And the risk is lopsided. BofA's own filing spells it out. A 1% rise in rates adds about $1.4 billion in income. A 1% drop takes away $1.9 billion. The downside outweighs the upside.

Here's what worries me. The bank's core capital ratio fell a full point in less than two years. It was 11.9% at the end of 2024. By June 2026 it had slipped to 11.2%. Now it is 10.9%. The floor set by regulators is 10.0%. That leaves less than one percentage point of room. CFO Alastair Borthwick said it on last Wednesday's call. Core capital sits at 10.9%. The regulatory floor is 10.0%. He said it like everything was fine. Each quarter of rising rates shrinks that buffer. A $1.2 billion regulatory fine last quarter made it worse. The bank admitted it broke rules on reporting suspicious transactions. It still returned $8.3 billion to shareholders. Six billion of that was buybacks. That pace can't hold if the cushion keeps thinning.

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I get it. BofA is not a small bank. It has $2 trillion in deposits. Those deposits mean it never has to sell the underwater bonds. It can hold them and collect par at maturity. That was Silicon Valley Bank's plan too. Hold to maturity. Wait it out. At SVB, unrealized losses hit 110% of capital before the doors closed. Depositors pulled $42 billion in a single day. The bank was gone two days later. BofA is at 55%. Not the same. But it was 40% at the end of last year. The trend line has moved one direction for five straight quarters. I have watched it climb. Nobody knows when direction matters more than size.

Bill Moreland founded BankRegData. He wrote this month that JPMorgan, Citi, and Goldman "are sitting pretty while we all kind of forget that Bank of America is a mess." Since the Fed began raising rates in 2022, BofA shares have returned about 21%. Goldman, Citi, and JPMorgan more than doubled. BofA's bond book is the biggest among its peers. It also yields the least. That means BofA earns less on its bonds while sitting on the most risk. BAC carries the largest unrealized loss of any U.S. bank. That comes from Florida Atlantic University's bank screener. Not by a small margin. By a wide one. BAC is down about 7% this year. The S&P 500 is up 13%. The stock traded as high as $65 in the past twelve months. It closed last Friday at $51.

The signals are not quiet. Last Wednesday, trading volume hit 115 million shares. That is 207% above the three-month average. The stock gapped down $4.13 before the opening bell. Last Thursday, BofA went back to the bond market after skipping bond sales all third quarter. Last Friday, a class action was filed on behalf of the New England Teamsters Pension Fund. The suit claims the bank made misleading statements. Nobody knows where this leads. But I notice nobody on Wall Street wants to talk about it.

$109 billion. Up 28% in one quarter. The hole grew $24 billion in three months while the bank earned $6.9 billion. Three to one against. That is the number your broker won't bring up at your next review.

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Brian Moynihan stood on the earnings call last Wednesday and listed every win. Loan growth. A bigger dividend. Six billion in buybacks. Underneath all of it, the hole grew $24 billion in ninety days. He never said the number out loud.

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2026/10/20