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Sorry, but you're completely misunderstanding what you're reading, or reading false information if that's your interpretation. Bond portfolios typically hold a

Sorry, but you're completely misunderstanding what you're reading, or reading false information if that's your interpretation. Bond portfolios typically hold a mix of maturities from 1, 2, 3, to 10-year+ maturities. The short term ones offer liquidity and protect against interest rate risk. Because if the interest rate increases and new bonds are issued at a higher rate, your maturing bonds become cash to purchase the new, higher-yield notes. Literally - call your 401k provider and ask to speak with an investment advisor if you don't believe me. Holding only 10-30 year HTMs is absolutely yield chasing. SVB skipped having the short-term maturities, because they do not offer much yield. It is basically the literal definition of yield chasing. >SVB would have been equally as lambasted for keeping the deposits in cash, as that's an equally as irresponsible thing to do. All cash would've been foolish, but considering the primary purpose of a bank is to provide liquidity for clients, it's a bit of a reach to call it equally irresponsible as assuming your banking clients would be fine waiting 6-10 years for your investments to mature.

Zetice 4y ago
Sure, but the thing they bought also had almost no yield, so that's what I'm not understanding. Why is shitty 1% 10 year T notes "yield chasing"? Those sound absurdly secure, and apparently have lots of mechanisms by which you can borrow against them should you need to in almost any non-runlike scenario. If the SVB bankers were "yield chasing" surely there were more effective ways of doing so at approximately the same risk.
- oarabbus_ 4y ago
  >Sure, but the thing they bought also had almost no yield, so that's what I'm not understanding. Why is shitty 1% 10 year T notes "yield chasing"? Exactly. the 1-year notes had zero interest rate risk, and almost no yield. The 10-year notes offered very high interest rate risk (remember: rates were almost zero) and barely-more-than-no-yield. Choosing 1.5% return at high interest rate risk vs. 0.5% return for low rate risk. Either way you are getting almost nothing, but one has the risk of putting you into a liquidity crisis. In a sense you're willing to risk it all to squeeze an extra 1%, It is the absolute definition of yield chasing. >and apparently have lots of mechanisms by which you can borrow against them should you need to in almost any non-runlike scenario. If your $1000 bond is worth $1005 at maturity, and it has dropped to $990 and you want to borrow from me against the bond, I will charge you at least $15 in this scenario. That's slightly oversimplified, but lenders (other than the Fed/QE) will loan at a rate where you're essentially locking in a loss, because they have what you need to offset your risk you failed to hedge against (liquidity). >If the SVB bankers were "yield chasing" surely there were more effective ways of doing so at approximately the same risk. Not that I am aware of, at that scale of money. There's also high-risk lending to borrowers (which SVB did) but companies might borrow $10M, $20M, maybe $100M. When you're talking $50-100B, Bonds are the only game in town.
  - Zetice 4y ago
    I honestly have no clue how to even research alternatives to the 10 year T note as an investment vehicle for SVB, but plenty of gigantic funds seem to be able to do all kinds of riskier investing so it doesn't seem like a fair question. There are tons of places to put money that are riskier, even billions, that would have yielded better returns. 30 year T notes, for example, seem to have been at double the 10 year notes in return at this time. Why not go for those if we're assuming greed as the driving factor here?
    - oivey 4y ago
      They aren’t a fund. They’re a bank. The alternative is exactly what GP just told you: a portfolio of bonds with varying maturity dates. Varying maturity dates reduces your risk in the case where you need to sell to get cash immediately because if interest rates go up, then you may have to sell at a loss. You may have to sell at a loss because it may be more profitable to buy a new bond than sit on your low interest bond, so you have to reduce the price of your bad bond to compete. It really does seem like a ludicrous bet to be so invested in long term bonds at a moment of historically low interest rates. That’s why it reads like greed. SVB seemingly did very little to reduce the risk on that absurd bet.
      - Zetice 4y ago
        I still don't get why not 30 yr notes, though, if this really was just greed.
        mrguyorama 4y ago
        Maybe the people who were stupid enough to lock up over half their balance sheet for ten years were smart enough to not do it for 30? Most financial people who take a stupid risk to chase yield don't think they are taking a stupid risk. They, through self delusion or other means, convince themselves it is a sure bet.
    - kgwgk 4y ago
      >> literally the only thing they could think of to do with the massive amount of money getting dumped in their lap > There are tons of places to put money that are riskier, even billions, that would have yielded better returns That there were many riskier alternatives doesn’t mean that there were no safer alternatives. (And by the way most of the riskier alternatives wouldn’t have actually yielded better returns in the last couple of years.)

Zetice 4y ago

Sure, but the thing they bought also had almost no yield, so that's what I'm not understanding. Why is shitty 1% 10 year T notes "yield chasing"? Those sound absurdly secure, and apparently have lots of mechanisms by which you can borrow against them should you need to in almost any non-runlike scenario. If the SVB bankers were "yield chasing" surely there were more effective ways of doing so at approximately the same risk.

oarabbus_ 4y ago
>Sure, but the thing they bought also had almost no yield, so that's what I'm not understanding. Why is shitty 1% 10 year T notes "yield chasing"? Exactly. the 1-year notes had zero interest rate risk, and almost no yield. The 10-year notes offered very high interest rate risk (remember: rates were almost zero) and barely-more-than-no-yield. Choosing 1.5% return at high interest rate risk vs. 0.5% return for low rate risk. Either way you are getting almost nothing, but one has the risk of putting you into a liquidity crisis. In a sense you're willing to risk it all to squeeze an extra 1%, It is the absolute definition of yield chasing. >and apparently have lots of mechanisms by which you can borrow against them should you need to in almost any non-runlike scenario. If your $1000 bond is worth $1005 at maturity, and it has dropped to $990 and you want to borrow from me against the bond, I will charge you at least $15 in this scenario. That's slightly oversimplified, but lenders (other than the Fed/QE) will loan at a rate where you're essentially locking in a loss, because they have what you need to offset your risk you failed to hedge against (liquidity). >If the SVB bankers were "yield chasing" surely there were more effective ways of doing so at approximately the same risk. Not that I am aware of, at that scale of money. There's also high-risk lending to borrowers (which SVB did) but companies might borrow $10M, $20M, maybe $100M. When you're talking $50-100B, Bonds are the only game in town.
- Zetice 4y ago
  I honestly have no clue how to even research alternatives to the 10 year T note as an investment vehicle for SVB, but plenty of gigantic funds seem to be able to do all kinds of riskier investing so it doesn't seem like a fair question. There are tons of places to put money that are riskier, even billions, that would have yielded better returns. 30 year T notes, for example, seem to have been at double the 10 year notes in return at this time. Why not go for those if we're assuming greed as the driving factor here?
  - oivey 4y ago
    They aren’t a fund. They’re a bank. The alternative is exactly what GP just told you: a portfolio of bonds with varying maturity dates. Varying maturity dates reduces your risk in the case where you need to sell to get cash immediately because if interest rates go up, then you may have to sell at a loss. You may have to sell at a loss because it may be more profitable to buy a new bond than sit on your low interest bond, so you have to reduce the price of your bad bond to compete. It really does seem like a ludicrous bet to be so invested in long term bonds at a moment of historically low interest rates. That’s why it reads like greed. SVB seemingly did very little to reduce the risk on that absurd bet.
    - Zetice 4y ago
      I still don't get why not 30 yr notes, though, if this really was just greed.
      - mrguyorama 4y ago
        Maybe the people who were stupid enough to lock up over half their balance sheet for ten years were smart enough to not do it for 30? Most financial people who take a stupid risk to chase yield don't think they are taking a stupid risk. They, through self delusion or other means, convince themselves it is a sure bet.
  - kgwgk 4y ago
    >> literally the only thing they could think of to do with the massive amount of money getting dumped in their lap > There are tons of places to put money that are riskier, even billions, that would have yielded better returns That there were many riskier alternatives doesn’t mean that there were no safer alternatives. (And by the way most of the riskier alternatives wouldn’t have actually yielded better returns in the last couple of years.)