Wells Fargo & Co is so confident interest rates will rise that it’s giving up $1bn to exit a richly profitable bet before it sours.
In recent weeks, the San Francisco-based lender ended what had been $86bn of interest-rate swaps meant to capitalise on its view that rates would stay lower for longer than many had expected, according to Neal Blinde, the bank’s treasurer. A $1bn loss from unwinding the swaps will be amortised over the next three years, and cuts the profit from the deal to around $2bn.
The swaps generated “tremendous financial benefits,” Blinde said Wednesday at an investor conference. “For a very long period of time, we were quite outspoken in our perspective that rates were going to remain low for an extended period of time.”
Wells Fargo’s position was built between 2014 and 2016, the bank said earlier this month in a filing. The firm began unwinding the bets in last year’s third quarter amid declarations by Federal Reserve officials that they intend to steadily raise interest rates as US economic growth picks up.
Over the next few months Wells Fargo slowly reduced its position. By the end of the year nearly $51bn in notional value remained, Wells Fargo records show. The bank exited the position “shortly” after its January earnings call, Blinde said.
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