Low-yielding bonds mature, and that is most of the thesis

A large bank that bought long-dated bonds when yields were low has been carrying a drag on its income ever since. The part that gets less attention is that the drag unwinds on a schedule, whether or not anyone notices.

Repricing by maturity

Every bond that matures is reinvested at today's yields. For a book bought at the bottom of the rate cycle, that is a steady lift to net interest income, bond by bond, quarter after quarter. It does not need a forecast about rates to work, only rates that stay above where the book was bought.

The same maturities release capital as the unrealised losses on those bonds shrink toward nothing at maturity.

What I'm watching

• The maturity schedule of the securities book
• Reinvestment yields against the yields rolling off
• Deposit costs, which could absorb the benefit if competition for deposits heats up

Where I stand

Long, on a repricing that is close to arithmetic. It is slow, and it is one of the few bank earnings drivers that does not depend on a view.

What would change my mind

Deposit costs rising faster than the book reprices. That would hand the benefit to depositors rather than shareholders, and the arithmetic would stop working.