Excellent analysis of how banks got themselves in a bad position this rate-rising cycle.
So much to learn – capitulation led banks into buying MBS that suffer from negative convexity “trapping” (by rising rates extending weighted average lives) banks into low-yielding assets, not enough capital to take losses, held-to-maturity accounting choice requiring marking everything to market (“tainting the book”), the head fake from a higher portion of floating assets pulling forward net interest margin gains.
The result – a worrying state of affairs with funding rates having a long way to go hurting earnings for a long time. This isn’t good for the credit outlook either.
