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> I understood that the bond assets can not be converted to enough liquidity to cover withdrawal demands, but it's not the same thing. If you own a house worth
by shkkmo 4y ago
> I understood that the bond assets can not be converted to enough liquidity to cover withdrawal demands, but it's not the same thing. If you own a house worth $1M, and I ask you to give me $1M tomorrow, you couldn't do it - but that doesn't mean your house is worth less.
The same bonds can be held in two different ways MTM (Mark to Market) and HTM (Hold to Maturity), the underlying bond is equally liquid (in that they would be sold to the same pool of buyers) but the way they are tracked in accounting differs.
It's like if you bought a house for $1M but then the housing market crashed and prices dropped by 20%. Regardless of whether you value the house as still worth 1M or $800k on your balance sheet, that doesn't change the liquidity of the house.
> What's "real value"? Is it the value of the income stream when held to maturity?
The market price of the bond.
> Then I never encountered any mention that these bonds were bad (in fact, some of them were Treasuries which are as good as any bond can be) - could you provide a source for this claim? If you mean "fire sale" value then yes, of course the "fire sale" value was low - but that's not because the bonds were bad, you can not value an asset by it's "fire sale" value.
There are two types of risk for these bonds. One is the risk of the bond issue defaulting on the bond. You are correct that this risk is extremely low for Treasury bonds (thought not for the MBS bonds that SVB also owned a lot of).
The other risk is due to interest rate changes. The reason the bonds are worth less on the market now is because interest rates have gone up. You can buy a 5 year bond with a higher interest rate than the 10 year bonds that SVB owns. Thus, if you are selling those bonds, you have to offer them at a discount so that buyers will see a comparable return to new bonds sold with higher interest rates.
The lower price has nothing to do with the number of bonds SVB needed to sell vs the size of the market for those bonds, but rather that the market values those bonds as lower given the current interest rates, regardless of how many of those bonds SVB needed to sell.