Monday, February 1, 2010

Wells Fargo Expecting Much Higher Interest Rates

Wells Fargo reduced investments in mostly fixed-income securities by $34 billion in 2009’s second half, company filings show, according to Bloomberg.

This is big.

“The bias is for higher rates,” Chief Executive Officer John Stumpf, said on the company’s fourth-quarter earnings call. “We’re willing to wait for that to happen. We think that’s the better trade.”

Warren Buffett’s Berkshire Hathaway is the banks largest shareholder and thus this decision was likely discussed and received the approval of Buffett.

How big of a deal is this for Wells Fargo?

By scaling back on the so-called carry trade, in which banks borrow in overnight lending markets at rates near zero and invest in higher-yielding securities, Wells Fargo aims to protect against losses when rates rise, but it forgoes the interest income it would have earned by putting on the trades.

If the bank had left its investments unchanged at the end of June, it would have earned about $1.15 billion of pretax income from the carry trade during the next six months, assuming an average yield of 6.78 percent on its debt securities and a top funding cost of 3.40 percent. (The yield and funding costs were calculated by Bloomberg and are based on company filings.)

Wells Fargo isn't giving up a billion dollars worth of interest income unless it is expecting a major spike in interest rates.


  1. I'm not sure how big this is. Every economic recovery is accompaned by higher interest rates. Its the standard history and everybody expects it to happen. But timing can be tricky.

    I would only caution that Buffet himself has said numerous times he does not forecast the market direction. In fact he often says he has no idea which way the market will move. The inverse of market moves are interest rate moves which suggests Buffet hasn't a clue about these trends either.

  2. Or this is further evidence that Wells is no longer making good decisions.