What should interest rates be for unrealized losses to be zero

Take into account the next chart of unrealized losses on securities held by reporting banks (from Rupkey / Financial Markets This Week):

Supply: Rupkey, “Monetary Markets This Week”, March 20, 2023.

This made me surprise what would flip these unrealized losses to zero? Clearly decrease rates of interest. I haven’t got the info to do the maths at hand, however I do have negotiable federal debt at face worth and market worth. I can take a look at the ratio of those two and the way that ratio adjustments with a given rate of interest.

Determine 1: Ratio of face worth of marketable debt to market worth (blue, left scale) and ten-year Treasury yield, % (tan, proper scale). The NBER has outlined peak-to-trough recession dates as shaded. Supply: Dallas Fed, Treasury, NBER and writer’s calculations.

There’s an apparent correlation. From regression:

report = 0.8817 + 0.0455(gs10)

adj-R2 = 0.83, NObs = 85, DW = 0.20

Utilizing this correlation, it seems {that a} 10-year yield of two.6% will do (by way of March they’re 3.8%, about the identical as February). Clearly that is the again of the envelope (and the ratio of par to market will not be the identical because the ratio of purchase worth to market worth), however you get the concept that if yields go down , a few of the unrealized losses will disappear.

How cheap is that this end result? Not very, however I’ll word that the 10-year price is down half a share level because the starting of March…

#curiosity #charges #unrealized #losses

By moh

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