America’s second-largest bank is back for more capital
Bank of America (NYSE: BAC) has returned to the bond market for the second time in less than a week, offering investors substantially higher yields than it paid on a comparable security last year.
After raising $8 billion in an unusual Friday bond sale, the bank launched another offering Tuesday involving perpetual notes, securities that have no fixed maturity date and can first be called after five years.
Initial pricing discussions indicate yields between 7.5% and 7.625%, compared with the 6.25% yield Bank of America paid when it sold $2.5 billion of similar securities in July 2025. Final terms have not yet been announced.
An additional 1.25 percentage points might not sound particularly dramatic, but financing costs become increasingly important when banks regularly raise billions of dollars.
The latest offering follows a turbulent stretch for U.S. credit markets, where higher Treasury yields, concerns over AI-related borrowing and persistent inflation have made investors more selective.
Bank of America has already issued approximately $25 billion in investment-grade debt this year, demonstrating its continued access to substantial funding even as market conditions deteriorate.
Investors are still willing to lend money to major American banks. The interesting question is how much they now expect to be paid for taking that risk.
Higher interest rates are becoming a double-edged sword
Bank of America’s latest financing arrives at an uncomfortable time.
Last week, the bank reported a 17% decline in quarterly profit to $6.9 billion, missing Wall Street expectations as weaker trading results and a $1.2 billion regulatory settlement weighed on earnings.
Its fixed-income trading division was particularly disappointing, with revenue falling 17%. Investment banking fees also declined 11%, reflecting a slowdown in parts of Wall Street’s dealmaking business.
Yet the bank’s underlying lending operations are performing considerably better.
Net interest income climbed 8% to $16.4 billion, supported by growing loan balances and higher returns on lending. Consumer spending remained resilient, while management reported approximately $914 billion in available liquidity resources.
Higher interest rates can benefit banks when the returns on their loans rise faster than the costs of funding them. That relationship becomes less attractive when investors demand higher yields on newly issued debt.
Perpetual securities generally carry higher yields than ordinary senior bank bonds because investors accept additional risks, including payment subordination and no guaranteed repayment date. Still, Bank of America’s latest pricing provides another indication of how demanding capital markets have become.
The same elevated interest rates supporting bank lending income are also making it more expensive to raise capital.
Bank of America thinks the Fed may make borrowing even more expensive
Perhaps the most interesting part of the story is that Bank of America’s economists do not believe the Federal Reserve is finished raising rates this month.
While most investors expect the Fed to leave rates unchanged at its October 28 meeting, Bank of America continues to forecast another increase.
Its reasoning centers on inflation.
September’s consumer price index climbed 3.7% from a year earlier, while producer prices increased 6.3%. The bank believes core personal consumption expenditures inflation, the Fed’s preferred underlying measure, could finish 2026 around 3.4%, considerably above the central bank’s 2% target.
Markets see things differently.
A Reuters survey of 100 economists found that 94 expect the Fed to hold rates steady next week, although most anticipate another increase in December.
An unexpected October hike could create another round of volatility in bonds, particularly if investors conclude that interest rates will remain elevated for longer than previously expected.
The consequences would extend well beyond Bank of America. Corporate borrowers already face expensive financing, AI infrastructure companies are issuing enormous amounts of debt, and the federal government continues competing for capital to fund its deficits.
Higher financing costs could eventually slow investment, reduce corporate profitability and put additional pressure on already expensive stock valuations.
Bank of America’s decision to return to the bond market is not evidence of a banking crisis. Its liquidity position remains substantial, and the fact that investors continue participating in its offerings shows that credit markets are functioning.
But the pricing deserves attention.
A major U.S. bank is raising billions at higher yields while its own economists expect interest rates to increase again.
With the Federal Reserve meeting just days away, investors are about to find out whether today’s expensive borrowing environment is approaching some relief or preparing for another round of tightening.
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