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From what I understand, for this method to become profitable (or even reasonably close) the interest rates have to drop down to where they were when the bonds w
by albatross13 4y ago
From what I understand, for this method to become profitable (or even reasonably close) the interest rates have to drop down to where they were when the bonds were purchased. Otherwise the bond yields will never be worth it and the price of the bond(s) continue to stay lower than what they were purchased for.
These bonds were most likely purchased when interest rates were near 0 and I don't think anyone is banking on those rates returning any time soon.
That being said, I'm going off of some basic reading I've done this morning: https://www.fbfs.com/learning-center/bonds-interest-rates-and-the-impact-of-inflation https://www.fbfs.com/learning-center/bonds-interest-rates-an...
- altdataseller 4y agoStupid question but why were they buying bonds when interest rated was near 0? Were they betting on negative interest rates?
- muzz 4y agoShort-term rates were near 0, but Long-term rates were 1.x%, which doesn't sound like much but keep in mind they bought tens of billions of dollars of these bonds. That 1.x% on that huge amount would be over $1 Billion per year. It's a mismatch in terms of the duration, ie your depositors can ask for their money back at any time but the bonds don't mature for many years, but as long as the deposits are kept there the bank can get away with it. The succinct answer is: Greed.
- albatross13 4y agoThis is a concise follow up, nicely put.