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> A 10Y T-Bill purchased on the first trading day of 2021 is now worth less than $0.80 on the dollar Just one note for those that aren't fully aware, the treas

> A 10Y T-Bill purchased on the first trading day of 2021 is now worth less than $0.80 on the dollar Just one note for those that aren't fully aware, the treasuries were only down approx 20% because they were forced to sell before the 10yr maturity. If they could have held the entire term they would get back 100%.

dougmwne 4y ago
Yes, another way to think about this is that if you bought an .80 t-bill today it would have the return on investment equivalent to a 1.00 bill bought last year. That’s because the new t-bill has a much higher interest rate. So in effect, as the fed raises interest rates, they are destroying the principle of every existing bond on the market. That’s a big problem for anyone owning bonds, especially if they are using them as collateral for leverage.
- JohnFen 4y ago
  > they are destroying the principle of every existing bond on the market What principle are they destroying? Bonds are not, and never were, immune to economic changes. They're just less volatile and react differently than stocks and, if you hold them to maturity, will pay what what they promised. It seems to me that the problem is that a whole bunch of people made investments assuming that there was effectively no risk in doing so. Like the good times would last forever or something.
  - deleted 4y ago
    [deleted]
  - candiodari 4y ago
    These bonds are not held as investments, but as collateral for getting other things (like money to buy mortgages with). If your collateral gets worse ...
    - JohnFen 4y ago
      Either way, they were treating them as if their value was guaranteed prior to maturity. That has never been a thing that these instruments guaranteed. They were gambling, because they failed to hedge that risk.
quantgenius 4y ago
They would have gotten their principal back but missing out on interest for 10 years is a huge cost, particularly if you have to pay out interest in the interim to your depositors.
- headsupftw 4y ago
  That's just another way of saying "that's why its price is down 20%".
  - caddemon 4y ago
    Yeah but it's important to understand why it's down 20%. Some commenters are acting like this was 100% irrational panic and SVB didn't do anything wrong, it's just too bad they couldn't hold out for awhile. What they actually did was put 40% of their deposits into a long term bond that would start paying a shit rate if interest rates went up. The invested money is borrowed from depositors so the only thing they really "own" is the interest. In order to keep depositors in a high interest environment it will require paying out some amount of interest too. But they have locked themselves in to gains at a now small interest rate. This was a risky bet for the bank from the start and there's absolutely no way they would make the trade they did if they knew interest rates would go up, even if they also had a guarantee that there would not be a bank run. This isn't a simple liquidity crisis or even somebody trying to stay solvent until their GameStop puts pay off.
stefan_ 4y ago
Just so we are all fully aware: SVB bet in ~2020 that interest rates they offer could be well below 1% (given their operating costs and what not) for 10 years. Obviously, by 2023 already, depositors were expecting much more. So, yeah, these MBS will probably pay out when held to maturity, but their customers didn't buy MBS, they deposited their money in a bank.
- beezle 4y ago
  Let us hope that the bank did not "bet" and instead had a decision making process.
  - caddemon 4y ago
    I mean objectively the bank bet that interest rates wouldn't go up, they took a massive unhedged position in exactly that. I hope the bank thought it was betting, because if they didn't realize they were betting on interest rates staying low then that is a shocking level of incompetence. They probably thought it was a safe bet, but it was a bet nonetheless with obvious risk if they were wrong.
    - beezle 4y ago
      By your definition any position that a bank takes is a "bet".
nostromo 4y ago
Owning bonds that pay 1% for 20 years when inflation is running at 7% is a great way to lose lots of money. You’ll get that money back come 2041, it just won’t be able to buy you much.
TacticalCoder 4y ago
> Just one note for those that aren't fully aware, the treasuries were only down approx 20% because they were forced to sell before the 10yr maturity. If they could have held the entire term they would get back 100%. 100% back in, say, 9 years at 1.5%. Or take the 20% hit today, buy back bonds giving 4% yearly and end up with the same amount. I mean: it's literally how the price drop is calculated right?
worik 4y ago
> If they could have held the entire term they would get back 100%. What counts is the real, not nominal, value
projektfu 4y ago
I noticed that he conflated the safety of a T-note* with the asset price. US Treasuries are AAA-rated super safe guaranteed returns because they're not expected to default or miss a coupon payment, and they'll be redeemed for the full value when they mature. That doesn't mean they don't have market prices that fluctuate. *T-bills are up to 52 weeks maturity.
- brockwhittaker 4y ago
  Thanks for the note! I'll change the wording in my article WRT bills/notes. :) With regards to safety, I noted that I think there are two types of safety to note here: 1. Default risk. 2. Asset price volatility. Ultimately if someone is willing and able to hold to expiry, they aren't subject to #2, but this clearly wasn't the case with SVB and may also be the case with other institutions. I think it lacks nuance to not consider the middle states between the purchase of a bond and the full return of the bond upon expiry.
- atomicnumber3 4y ago
  Heh I was wondering if someone else would spot that too. Who said finance people aren't fun at parties?
  - projektfu 4y ago
    Ha, it's one of those things I don't care if people get wrong but I have trouble saying incorrectly myself.
beezle 4y ago
Responding more to the quote: First off - it is not a 10Y T-bill. T-bills extend to 52 weeks. From that point through 10Y are "notes" and everything longer are bonds. Second anyone involved professionally in the markets understands the duration (not maturity) of bonds and how coupon rate and market interest rate will effect the price of said bond. [those interested can google terms like 'modified duration']. So there is absolutely no shock that the price of 10yr paper with a 50bp coupon would be near 80 in the current rate environment.
bjornsing 4y ago
> If they could have held the entire term they would get back 100%. Yes. But those "100%" wouldn't be worth as much, due to inflation. There's also an opportunity cost to consider: if you sell now with 20% loss you get a chance to invest that money wiser.

dougmwne 4y ago

Yes, another way to think about this is that if you bought an .80 t-bill today it would have the return on investment equivalent to a 1.00 bill bought last year. That’s because the new t-bill has a much higher interest rate. So in effect, as the fed raises interest rates, they are destroying the principle of every existing bond on the market. That’s a big problem for anyone owning bonds, especially if they are using them as collateral for leverage.

JohnFen 4y ago
> they are destroying the principle of every existing bond on the market What principle are they destroying? Bonds are not, and never were, immune to economic changes. They're just less volatile and react differently than stocks and, if you hold them to maturity, will pay what what they promised. It seems to me that the problem is that a whole bunch of people made investments assuming that there was effectively no risk in doing so. Like the good times would last forever or something.
- deleted 4y ago
  [deleted]
- candiodari 4y ago
  These bonds are not held as investments, but as collateral for getting other things (like money to buy mortgages with). If your collateral gets worse ...
  - JohnFen 4y ago
    Either way, they were treating them as if their value was guaranteed prior to maturity. That has never been a thing that these instruments guaranteed. They were gambling, because they failed to hedge that risk.

quantgenius 4y ago

They would have gotten their principal back but missing out on interest for 10 years is a huge cost, particularly if you have to pay out interest in the interim to your depositors.

headsupftw 4y ago
That's just another way of saying "that's why its price is down 20%".
- caddemon 4y ago
  Yeah but it's important to understand why it's down 20%. Some commenters are acting like this was 100% irrational panic and SVB didn't do anything wrong, it's just too bad they couldn't hold out for awhile. What they actually did was put 40% of their deposits into a long term bond that would start paying a shit rate if interest rates went up. The invested money is borrowed from depositors so the only thing they really "own" is the interest. In order to keep depositors in a high interest environment it will require paying out some amount of interest too. But they have locked themselves in to gains at a now small interest rate. This was a risky bet for the bank from the start and there's absolutely no way they would make the trade they did if they knew interest rates would go up, even if they also had a guarantee that there would not be a bank run. This isn't a simple liquidity crisis or even somebody trying to stay solvent until their GameStop puts pay off.

stefan_ 4y ago

Just so we are all fully aware: SVB bet in ~2020 that interest rates they offer could be well below 1% (given their operating costs and what not) for 10 years. Obviously, by 2023 already, depositors were expecting much more. So, yeah, these MBS will probably pay out when held to maturity, but their customers didn't buy MBS, they deposited their money in a bank.

beezle 4y ago
Let us hope that the bank did not "bet" and instead had a decision making process.
- caddemon 4y ago
  I mean objectively the bank bet that interest rates wouldn't go up, they took a massive unhedged position in exactly that. I hope the bank thought it was betting, because if they didn't realize they were betting on interest rates staying low then that is a shocking level of incompetence. They probably thought it was a safe bet, but it was a bet nonetheless with obvious risk if they were wrong.
  - beezle 4y ago
    By your definition any position that a bank takes is a "bet".

nostromo 4y ago

Owning bonds that pay 1% for 20 years when inflation is running at 7% is a great way to lose lots of money. You’ll get that money back come 2041, it just won’t be able to buy you much.

TacticalCoder 4y ago

> Just one note for those that aren't fully aware, the treasuries were only down approx 20% because they were forced to sell before the 10yr maturity. If they could have held the entire term they would get back 100%. 100% back in, say, 9 years at 1.5%. Or take the 20% hit today, buy back bonds giving 4% yearly and end up with the same amount. I mean: it's literally how the price drop is calculated right?

worik 4y ago

> If they could have held the entire term they would get back 100%. What counts is the real, not nominal, value

projektfu 4y ago

I noticed that he conflated the safety of a T-note* with the asset price. US Treasuries are AAA-rated super safe guaranteed returns because they're not expected to default or miss a coupon payment, and they'll be redeemed for the full value when they mature. That doesn't mean they don't have market prices that fluctuate. *T-bills are up to 52 weeks maturity.

brockwhittaker 4y ago
Thanks for the note! I'll change the wording in my article WRT bills/notes. :) With regards to safety, I noted that I think there are two types of safety to note here: 1. Default risk. 2. Asset price volatility. Ultimately if someone is willing and able to hold to expiry, they aren't subject to #2, but this clearly wasn't the case with SVB and may also be the case with other institutions. I think it lacks nuance to not consider the middle states between the purchase of a bond and the full return of the bond upon expiry.
atomicnumber3 4y ago
Heh I was wondering if someone else would spot that too. Who said finance people aren't fun at parties?
- projektfu 4y ago
  Ha, it's one of those things I don't care if people get wrong but I have trouble saying incorrectly myself.

beezle 4y ago

Responding more to the quote: First off - it is not a 10Y T-bill. T-bills extend to 52 weeks. From that point through 10Y are "notes" and everything longer are bonds. Second anyone involved professionally in the markets understands the duration (not maturity) of bonds and how coupon rate and market interest rate will effect the price of said bond. [those interested can google terms like 'modified duration']. So there is absolutely no shock that the price of 10yr paper with a 50bp coupon would be near 80 in the current rate environment.

bjornsing 4y ago

> If they could have held the entire term they would get back 100%. Yes. But those "100%" wouldn't be worth as much, due to inflation. There's also an opportunity cost to consider: if you sell now with 20% loss you get a chance to invest that money wiser.