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That’s essentially what I’m saying, except that I’m explaining why they bought 10 year bills in the first place instead of shorter and more liquid ones. Forget

That’s essentially what I’m saying, except that I’m explaining why they bought 10 year bills in the first place instead of shorter and more liquid ones. Forget the numbers. The long term ones are advantageous on their books because they cost less to purchase than short term ones but still record at the full HTM value. With stable and low demand on withdrawals, using that HTM value isn’t unreasonable since the bills are sure to mature and so the difference of cost between short and long term bills means their books look better for less. There’s predictable risk to the play, but they probably needed the extra bit of wiggle room on their balance sheet and felt it should be fine as long as interest rates stay low and deposits don’t pick up. But of course neither of those was going to hold. And so (as you noted) their bills grossly devalued and their account holders changed borrowing and withdrawl patterns as the economy shifted. Both factors built into the risk fell through and they went from probably-marginal to downright-damned.

oarabbus_ 4y ago
Actually, the yield curve was inverted at the time they made the purchases, compounding how strange their decision was.
jussij 4y ago
Bond yield and price are inversely related, meaning when the price goes up the yield goes down and vice versa and this relationship creates the risk. If a company buys low interest bonds (i.e. interest is yield) in a market where interest rates are going up, at some point the cash rate will exceed their bond yield and at that point the bond price drops to match the current interest rate. Why this happens is when the interest rate is above the bond yield, no one will purchase the bond at the original price, as they can get a much better return in the overnight cash market. That means the price of the bond falls to a point where the bond yield now matches the cash rate plus some margin for any future risk. That lower price gives the asset it's true value. So as the cash rate continues to rise the bond price continues to fall and without doing anything, SVG finds itself bleeding hundreds of millions in asset value, with no end in sight. That then creates the panic and the rest is history.

oarabbus_ 4y ago

Actually, the yield curve was inverted at the time they made the purchases, compounding how strange their decision was.

jussij 4y ago

Bond yield and price are inversely related, meaning when the price goes up the yield goes down and vice versa and this relationship creates the risk. If a company buys low interest bonds (i.e. interest is yield) in a market where interest rates are going up, at some point the cash rate will exceed their bond yield and at that point the bond price drops to match the current interest rate. Why this happens is when the interest rate is above the bond yield, no one will purchase the bond at the original price, as they can get a much better return in the overnight cash market. That means the price of the bond falls to a point where the bond yield now matches the cash rate plus some margin for any future risk. That lower price gives the asset it's true value. So as the cash rate continues to rise the bond price continues to fall and without doing anything, SVG finds itself bleeding hundreds of millions in asset value, with no end in sight. That then creates the panic and the rest is history.