Forget CDs Or Treasuries: Bank of America Offering 6.55% Yielding Bond (NYSE:BAC) (2024)
Later this week, Bank of America (NYSE:BAC) is issuing a 10-year corporate note with a 6.55% coupon rate for fixed income investors. The bond is offering an interest rate 90 basis points higher than the highest coupon certificate of deposits currently on the open market. The interest rate is also higher than newly issued A or BBB debt from other banks, and 25 basis points higher than Citigroup, which is a peer bank with a notch lower credit rating. It also helps that Bank of America has "too big to fail" status.
On Tuesday, Bank of America released its third quarter earnings report, which showed the bank was facing challenges related to the interest rate environment, but the risks to the bank remained low. Net interest income (which is interest income less interest expense) has remained relatively flat on a quarterly basis over the last four quarters but has risen above pre-pandemic levels. Essentially, the growth in interest income related to higher interest rates has outgrown the rise in interest expenses.
Where investors may be surprised regarding Bank of America's third quarter results comes in the form of deposit growth. Early in the regional banking crisis, there was a concern that uninsured depositors would pull their funds from regional banks and place them in "too big to fail" banks. In the case of Bank of America, this does not appear to be happening as total deposits have declined on a year over year basis for the past five consecutive quarters.
The decline in deposits has led to Bank of America needing to increase its short-term borrowings and long-term debt, which impacts its interest expense. Despite the increase in non-deposit borrowings, shareholder equity in the bank has still grown from a year ago. While the bank's increased borrowings has lowered the interest rate spread (asset yield less rate on interest bearing assets) over the past few quarters, the bank's noninterest income has been able to lift its net interest margin.
Bank of America also has healthy financial ratios when compared to the commercial banking sector. Over the last few quarters, the bank has built its cash balance against its deposits to hopefully reduce its reliance on future borrowing. Additionally, the bank's loan to deposit ratio is modest compared to the industry. The low loan to deposit ratio allows for the bank to continue lending even if deposits fail to grow, which they have continued to grow lending albeit at a lower year over year rate.
Besides the coupon premium compared to its peers, Bank of America's 6.55% ten-year bond is yielding at a comparable rate to the bank's fixed rate preferred shares, which are junior on the capital ladder to their debt. While the floating rate preferred shares are trading at yields 100 basis points higher than the new bonds, investors risk lower dividends should interest rates drop soon.
It's important to note that the 6.55% coupon bonds maturing in October of 2033 do have call risk attached to them. These bonds can be redeemed at par value starting in October of 2025 and every six months after that. Investors do not risk losing value on their investment if they buy at the issue date or at a discount later, but they should be mindful of this risk should the bond trade above par later. A par call would likely occur if interest rates are lower than at the time of issue, but the call should be under better circ*mstances for investors to utilize the proceeds in the equity market.
Investors may be seeking safety with short term Treasury bonds or CDs, but "too big to fail" banks are beginning to offer attractive rates on their debt as well. Bank of America's 6.55% coupon bond offers a higher return than most investment grade fixed income along with the implicit backing of the United States government.
Jeremy LaKosh
About My Writing: I am currently focused on income investing through either common shares, preferred shares, or bonds. I will occasionally break away and write about the economy at large or a special situation involving a company I've been researching in.I target two articles per week for publication on Monday and Tuesday.About My Background: Bachelors in history/political science, Masters in Business Administration with a specialization in Finance and Economics. I enjoy numbers. I have been investing since 2000. Professionally, I am the CEO of an independent living retirement community in Illinois.
Analyst’s Disclosure:I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I have an order out for Bank of America debt maturing in October 2033.
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Bank of America is issuing a 10-year corporate note with a 6.55% coupon rate, offering a higher interest rate than other banks and certificate of deposits. The bank's net interest income has remained flat but has risen above pre-pandemic levels, and deposit growth has declined for five consecutive quarters.
Industry leadership. BofA was the #1 overall underwriter of municipal bonds in 2023, serving as senior manager on more than $45 billion of municipal bonds. The team has been the #1 ranked underwriter for 12 consecutive years since 2012. BofA was also the #1 competitive underwriter in 2023 — our 32nd straight year.
The highest-quality bonds are rated Aaa at Moody's and AAA at S&P and Fitch, with the scales declining from there. Moody's ratings of Baa3 and BBB at S&P and Fitch are considered the lowest investment-grade ratings. Ratings below this are considered high-yield or junk.
Bank of America Losses on Bond Portfolio Hit $109 Billion in First Quarter as Rates Rose. Bank of America's adjusted earnings topped expectations in the first quarter, but one part of the company's financial results worsened: the big paper losses on a key portion of its enormous bond portfolio.
As of April 2024, no banks are offering 7% interest rates on savings accounts. Two credit unions have high-interest checking accounts: Landmark Credit Union Premium Checking with 7.50% APY and OnPath Credit Union High Yield Checking with 7.00% APY.
Series I Savings Bonds are our choice for the best U.S. savings bonds because they offer a higher return that adjusts with inflation, can be delivered electronically or in paper form, and may avoid Federal taxation when used to pay for higher education.
Is Bank of America FDIC insured? Yes, all Bank of America bank accounts are FDIC insured (FDIC #3510) up to $250,000 per depositor, for each account ownership category, in the event of a bank failure.
Yes, you can lose money investing in bonds if the bond issuer defaults on the loan or if you sell the bond for less than you bought it for. Are bonds safe if the market crashes? Even if the stock market crashes, you aren't likely to see your bond investments take large hits.
Corporate bonds tend to pay a higher yield than Treasury bonds since corporate bonds have default risk, while Treasuries are guaranteed if held to maturity. Are bonds good investments? Investors must weigh their risk tolerance with a bond's risk of default, the bond's yield, and how long their money will be tied up.
Yes, if your money is in a U.S. bank insured by the Federal Deposit Insurance Corp. and you have less than $250,000 there. If the bank fails, you'll get your money back. Nearly all banks are FDIC insured.
Barron's has reported that Bank of America has emerged as the “problem child” of the big banks because its holdings of low-yielding mortgage securities and government debt have it sitting on hefty unrealized losses on its balance sheet due to the Federal Reserve rapidly hiking interest rates.
Definition: Coupon rate is the rate of interest paid by bond issuers on the bond's face value. It is the periodic rate of interest paid by bond issuers to its purchasers. The coupon rate is calculated on the bond's face value (or par value), not on the issue price or market value.
The interest rate is the rate charged by the lender to the borrower for the borrowed amount.The coupon rate is calculated on the face value of the bond, which is being invested. The interest rate is calculated considering the basis of the riskiness of lending the amount to the borrower.
What Is a Current Coupon? A current coupon refers to a security that is trading closest to its par value without going over par. In other words, the bond's market price is at or near to its issued face value.
Introduction: My name is Saturnina Altenwerth DVM, I am a witty, perfect, combative, beautiful, determined, fancy, determined person who loves writing and wants to share my knowledge and understanding with you.
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