Low-coupon legacy paper traps bank liquidity
The guest argued that banks holding low-coupon mortgage-backed securities from the COVID era face rising unrealized losses and illiquidity as long-term rates remain elevated.
The argument
Securities like 2% Ginnie Mae coupons are trading in the low 70s, making them virtually unsellable without realizing massive losses. This locks up balance sheets and pressures institutions like Bank of America and Charles Schwab that hold significant legacy portfolios.
The thesis, stress-tested
✓ What validates it
- ✓Bank of America or Schwab reporting higher unrealized losses in their held-to-maturity portfolios next quarter
- ✓The 10-year Treasury yield rising further above 4.5%
▸ Risks discussed
- ▸A sharp decline in long-term Treasury yields would reduce unrealized losses
- ▸Increased deposit growth could offset liquidity constraints
Hear it yourself
"The banks are gonna take losses when we do inevitably see a correction in the world of AI. You know, as we wrote, this week, Julia, is Micron Technology, a company I love, by the way, I've been following them for a long time, worth a trillion dollars? Well, maybe the dollar is not worth what we thought it was. I don't know. Maybe we're just gonna get used to that, like trillion dollar market caps or something. Well, it's inflation. That's what it is. I remember when it was, like, a headline. Yeah. Was it Apple that hit it? Everyone was, like, wait it was, like, years ago, we were waiting for it to hit a trillion."
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