Dec 18, 2023, 4:49 pm EST Bank of America stock fell 0.5% Monday. SPENCER PLATT/GETTY IMAGES Few bank CEOs are probably happier with the bond market rally than Bank of America BAC -0.51% ’s Brian Moynihan. Bank of America was sitting on the industry’s largest unrealized bond losses by a wide margin at the end of the third quarter and those losses have narrowed significantly since the fixed-income rally got under way in late October. Barron’s estimates the losses—in a$603 billion portfolio of Treasuries and mortgage securities classified as held to maturity for accounting purposes—could be about $100 billion now, down from $131 billion at the end of September. By contrast, JPMorgan Chase’s unrealized bond losses may be in the $30 billion to $35 billion range now, down from about $40 billion at the end of third quarter. The paper losses don’t depress Bank of America’s capital ratios based on accounting rules but many investors still focus on them. Warren Buffett, the CEO of Berkshire Hathaway, Bank of America’s largest shareholder, has been critical of banks for buying mortgage securities at historic lows in rates during 2020 and 2021. Buffett, however, hasn’t singled out Bank of America for criticism. Buffett pointed out that mortgage securities behave badly in rising rate environment. They lengthen in effective maturity, the opposite of what holders want. Berkshire, which owns about one billion shares, or 13%, of the bank’s stock, hasn’t added to its holding this year. The narrower losses have helped Bank of America stock, which has risen by about a third from its late October low, which was around the time the Treasury 10-year note peaked at a 5% yield. It now yields 3.95%. The price of mortgage securities is up by about 5% since Sept. 30, which would be consistent with a $30 billion reduction in the bank’s losses. Bank of America shares fell 0.5% Monday to $33.42. Even with the recent gains, Bank of America stock is behind its peers this year with a gain of 1% while industry leader JPMorgan has risen 24%. Bank of America also is considerably behind JPMorgan over the past five years with an annualized total return of 9% against 14% for JPMorgan. The paper losses don’t depress Bank of America’s capital ratios based on accounting rules, but they are still huge relative to its capital base. Bank of America’s tangible common equity capital of $188 billion at the end of the third quarter would be cut in half if the paper bond losses flowed through its capital position. Another group of bonds, which are classified as available for sale for accounting purposes, do flow through into bank capital. On the company’s third-quarter conference call, UBS analyst Erika Najarian said the held-to-maturity portfolio has been a “thorn in the side of the stock.” Bank of America executives have argued the portfolio, consisting largely of federal agency mortgage securities, basically has zero credit risk and will mature over time, allowing the bank to reinvest at higher rates. The portfolio is declining at about $10 billion per quarter as the mortgage securities are paid down. Moynihan told CNBC in October the bank’s net interest margin should start to expand by the middle of 2024. Still, the portfolio, with an average rate of about 2.5%, could weigh on the bank’s returns for several years and the paper losses could expand once again if rates turn higher. Bank of America accumulated the portfolio mostly during 2020 and 2021 when rates were at historic lows. JPMorgan, under the leadership of CEO Jamie Dimon, out-managed Bank of America during that period with Dimon refusing to make the same investment in long-term securities. Dimon was willing to take the near-term hit to earnings in 2020 and 2021 by not buying as many long-term bonds yielding 1% to 2% in that period because he felt the risk-reward was poor. Bank of America, which declined to comment, will have more to say on the matter when it reports its fourth-quarter earnings in January.