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Why is n earth did they buy 10 year bonds at historically low rates? I don’t understand why that seemed like a good idea.

muzz 4y ago
Because the rate in long term bonds was 1.x% compared to 0% for the short term bonds. It was a risky move but one that could have panned out if the deposits had remained.
- NhanH 4y ago
  It could only have panned out if the interest rate have remained. Once the interest rate increased, the deposits will chase higher rate, which SVB can’t provide and depositors will naturally withdraw their funds.
  - muzz 4y ago
    True but that doesn't happen all at once. Rates have been rising for more than a year now (not in a straight line but overall of course). They could have unwound this carry trade in March 2022 and probably come out ahead. Had they waited until summer 2022 they probably would have had a small loss. As it turns out though they held on for bigger losses.
riffraff 4y ago
Banks often do this, trade short term risk for long term and pocket the difference. It seems SVB didn't account for the fact that there was a strong correlation between the source of their money (tech propped up by low rates) and their investment risk (bonds/loans propped up by low rates). I'm honestly unsure if we can ascribe this to to incompetence or greed.
lordnacho 4y ago
This is a form of the carry trade. You're borrowing at a lower yield to lend at the higher yield, and the risk is that you have to liquidate before the long one is mature. Traders do this all the time, because every day you carry this position you're making the difference in yields. The risk is always the same: the value of the things that give you the yield may change by enough to wipe out the interest difference.
- MrMan 4y ago
  buy side traders blowing up is a lot different than a bank blowing up so the risks are not the same
asimpletune 4y ago
Because rates were near 0 at the time for short term bonds. Interest rates were so low that there was nowhere else to park the money. Usually this is fixed with loans but with startups having lots of VC money they didn’t need loans.
- deleted 4y ago
  [deleted]

muzz 4y ago

Because the rate in long term bonds was 1.x% compared to 0% for the short term bonds. It was a risky move but one that could have panned out if the deposits had remained.

NhanH 4y ago
It could only have panned out if the interest rate have remained. Once the interest rate increased, the deposits will chase higher rate, which SVB can’t provide and depositors will naturally withdraw their funds.
- muzz 4y ago
  True but that doesn't happen all at once. Rates have been rising for more than a year now (not in a straight line but overall of course). They could have unwound this carry trade in March 2022 and probably come out ahead. Had they waited until summer 2022 they probably would have had a small loss. As it turns out though they held on for bigger losses.

riffraff 4y ago

Banks often do this, trade short term risk for long term and pocket the difference. It seems SVB didn't account for the fact that there was a strong correlation between the source of their money (tech propped up by low rates) and their investment risk (bonds/loans propped up by low rates). I'm honestly unsure if we can ascribe this to to incompetence or greed.

lordnacho 4y ago

This is a form of the carry trade. You're borrowing at a lower yield to lend at the higher yield, and the risk is that you have to liquidate before the long one is mature. Traders do this all the time, because every day you carry this position you're making the difference in yields. The risk is always the same: the value of the things that give you the yield may change by enough to wipe out the interest difference.

MrMan 4y ago
buy side traders blowing up is a lot different than a bank blowing up so the risks are not the same

asimpletune 4y ago

Because rates were near 0 at the time for short term bonds. Interest rates were so low that there was nowhere else to park the money. Usually this is fixed with loans but with startups having lots of VC money they didn’t need loans.

deleted 4y ago
[deleted]