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SVB could have bought 3-year, 1-year, 6-month Treasury bills with that money -- which during 2020 and 2021 were yielding <0.25%. This would have been "safer",

by ketzo 4y ago

SVB could have bought 3-year, 1-year, 6-month Treasury bills with that money -- which during 2020 and 2021 were yielding <0.25%. This would have been "safer", but lost them money. Instead, they bought 10-, 20-, and 30-year T-Bills which were yielding more like 2-3%. Not much by today's interest-rate standards, but significantly more than 0.25%. That appetite for long-dated bills could, I think, be described as "yield chasing." It was a decision made for short-term financial gain in ignorance of the risks involved.

Zetice 4y ago
My understanding was they they were 10 year T notes @ ~1%, which is kind of where I get lost. There are way better ways to "yield chase" than this, why are we presuming greed here when it seems just as likely to be incompetence?
- jmathai 4y ago
  My guess is because this is supposed to be a core competency of a bank. If a doctor unknowingly took out your heart instead of your gall bladder, it may be incompetence but that's unlikely.
  - Zetice 4y ago
    Isn't this exactly what Hanlon's Razor was invented for?
- oarabbus_ 4y ago
  >There are way better ways to "yield chase" than this, Such as what? There are not, if you have $50-100B. Your options as a bank are either treasury bonds or mortgage-backed securities. As a private sector investor (e.g. Warren Buffett) you have the additional option of equity investing, but it will take many years to move that much money.
oarabbus_ 4y ago
>This would have been "safer", but lost them money. In a short-term sense, but the point of short-dated maturities is not to produce yield but rather provide liquidity, which allows you to purchase higher-yielding 10+ year notes in the event the interest rate rises. They would've actually gained money by (1) not being forced to sell assets at a loss, thereby leading to a run and also becoming insolvent and (2) e.g. used the maturing short-dated bonds to purchase 3-year treasuries at today's 4.1% rate, rather than their shitty 1.8% 10-year notes.
- shkkmo 4y ago
  10 year bonds are liquid in that they are sellable at market rates but are more exposed to interest rate changes.

by ketzo 4y ago

Zetice 4y ago

My understanding was they they were 10 year T notes @ ~1%, which is kind of where I get lost. There are way better ways to "yield chase" than this, why are we presuming greed here when it seems just as likely to be incompetence?

jmathai 4y ago
My guess is because this is supposed to be a core competency of a bank. If a doctor unknowingly took out your heart instead of your gall bladder, it may be incompetence but that's unlikely.
- Zetice 4y ago
  Isn't this exactly what Hanlon's Razor was invented for?
oarabbus_ 4y ago
>There are way better ways to "yield chase" than this, Such as what? There are not, if you have $50-100B. Your options as a bank are either treasury bonds or mortgage-backed securities. As a private sector investor (e.g. Warren Buffett) you have the additional option of equity investing, but it will take many years to move that much money.

oarabbus_ 4y ago

>This would have been "safer", but lost them money. In a short-term sense, but the point of short-dated maturities is not to produce yield but rather provide liquidity, which allows you to purchase higher-yielding 10+ year notes in the event the interest rate rises. They would've actually gained money by (1) not being forced to sell assets at a loss, thereby leading to a run and also becoming insolvent and (2) e.g. used the maturing short-dated bonds to purchase 3-year treasuries at today's 4.1% rate, rather than their shitty 1.8% 10-year notes.

shkkmo 4y ago
10 year bonds are liquid in that they are sellable at market rates but are more exposed to interest rate changes.