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It was their unwise bet on ten year T bonds that got SVB into difficulties, a far larger societal economic issue than is being acknowledged. 'This decade’s lea

It was their unwise bet on ten year T bonds that got SVB into difficulties, a far larger societal economic issue than is being acknowledged. 'This decade’s learning: bonds aren’t a universally safe asset class.' ...the US federal reserve are playing a dangerous game battling the inflation they enabled with rate hikes http://www.brooock.com/a/svb-collapse-exposes-cracks-in-economy http://www.brooock.com/a/svb-collapse-exposes-cracks-in-econ...

mhb 4y ago
What is the larger issue? That people buying bonds don't understand that their value drops when interest rates go up and that if you might need the money from the bonds before the bond matures you need to hedge for that?
- olivermarks 4y ago
  From the link I posted: 'What this means going forward An unintended side effect of the Federal Reserve’s rate hikes is that many banks and institutions are holding an unfathomable amount of low-yield debt that is now worth far less than it was a year ago. We went from a world where 100-Year Austrian bonds would pay only 0.39% yields, to one where we’re now concerned about 8-9% annual inflation, in just two years. If institutions rightfully start deeming long-dated bonds to be a risky asset that isn't safe to hold on sensitive balance sheets, we could see bond premiums rise for these longer-dated bonds, raising the cost of capital for companies and governments alike...'
  - mhb 4y ago
    Safe is doing a lot of work here. Government bonds are safe from default. Not from changing value when interest rates change.
  - JohnFen 4y ago
    Don't see how that means it's the fed's fault, though. Anyone who has even halfway paid attention to markets over the just the past few decades should be acutely aware that markets can change very quickly. Expecting current conditions to last forever, or that you will always have notice that change is afoot, is just insanity or incompetence.
- cal5k 4y ago
  At the time they were purchased, central banks around the world were going out of their way to assure people that rates would not be going up for a long time. Not excusing their failure to properly account for duration risk, but regulators didn't see this coming either - what they were doing was considered to be not only wholly acceptable, but downright "safe".
  - olivermarks 4y ago
    It was naive, lazy and dangerous of SVB to assume in a 10 year window nothing would change IMO
    - mhb 4y ago
      Don't forget greedy. Not hedging saves money.
  - eep_social 4y ago
    Central banks have been telegraphing rate increases for over a year. Your statement might have been true on the day of the purchase but SVB had an entire year to fix their mistake and failed to do so.
shagie 4y ago
The bonds are worth exactly what they thought they'd be worth if held. There is no bet on that part. The purchase of 10 year bonds also implied a bet that faster maturing bonds won't be more valuable. As shown in https://fred.stlouisfed.org/series/T10Y3M https://fred.stlouisfed.org/series/T10Y3M that is no longer a true statement and that bet failed. It was a true statement for about 15 years with one flirtation in August of 2019. It appears that this is is more than a flirtation and more of a dip than past events have been. The bonds are as secure as ever - just that more money can be made faster in something other than the 10 year bonds. If (and that's two letters with a lot of weight) we had continued the tech growth seen in the early part of the pandemic and money flowing into SVB, their plan would have worked (or worked better at least), but they failed to account for the possibility that interest rates would go up and that people would be hesitant to fund startups and the startups would be taking money out for payroll faster than they put it in from new rounds of funding.
- pg314 4y ago
  > The bonds are worth exactly what they thought they'd be worth if held. That's wrong. A 10 year treasury bond with a .60% you bought in august 2020 is now worth significantly less. Whether you hold it or not is irrelevant. If you disagree, I'm willing to give you one, if you give me a 7 year treasury bond at the current interest rate of 3.86%.
  - shagie 4y ago
    Has the amount that it pays when it reaches maturity changed? The yield curve has gone negative - the shorter term bonds are worth more than the longer term ones (and certainly the longer term ones bought back in 2021). And if you were trying to sell me a 10 year note at 0.6% I'd want a serious discount because even your 7 year note at 3.86%, I can do better with a 3 month note at 4.794% or a 6 month note at 5.086%. https://www.marketwatch.com/investing/bond/tmubmusd03m?countrycode=bx https://www.marketwatch.com/investing/bond/tmubmusd03m?count... But that's if you were trying to sell it now. The amount it will pay at maturity remains unchanged and in 10 years it will be worth exactly the same no matter what the financial history that brought it to that point was.

mhb 4y ago

What is the larger issue? That people buying bonds don't understand that their value drops when interest rates go up and that if you might need the money from the bonds before the bond matures you need to hedge for that?

olivermarks 4y ago
From the link I posted: 'What this means going forward An unintended side effect of the Federal Reserve’s rate hikes is that many banks and institutions are holding an unfathomable amount of low-yield debt that is now worth far less than it was a year ago. We went from a world where 100-Year Austrian bonds would pay only 0.39% yields, to one where we’re now concerned about 8-9% annual inflation, in just two years. If institutions rightfully start deeming long-dated bonds to be a risky asset that isn't safe to hold on sensitive balance sheets, we could see bond premiums rise for these longer-dated bonds, raising the cost of capital for companies and governments alike...'
- mhb 4y ago
  Safe is doing a lot of work here. Government bonds are safe from default. Not from changing value when interest rates change.
- JohnFen 4y ago
  Don't see how that means it's the fed's fault, though. Anyone who has even halfway paid attention to markets over the just the past few decades should be acutely aware that markets can change very quickly. Expecting current conditions to last forever, or that you will always have notice that change is afoot, is just insanity or incompetence.
cal5k 4y ago
At the time they were purchased, central banks around the world were going out of their way to assure people that rates would not be going up for a long time. Not excusing their failure to properly account for duration risk, but regulators didn't see this coming either - what they were doing was considered to be not only wholly acceptable, but downright "safe".
- olivermarks 4y ago
  It was naive, lazy and dangerous of SVB to assume in a 10 year window nothing would change IMO
  - mhb 4y ago
    Don't forget greedy. Not hedging saves money.
- eep_social 4y ago
  Central banks have been telegraphing rate increases for over a year. Your statement might have been true on the day of the purchase but SVB had an entire year to fix their mistake and failed to do so.

shagie 4y ago

The bonds are worth exactly what they thought they'd be worth if held. There is no bet on that part. The purchase of 10 year bonds also implied a bet that faster maturing bonds won't be more valuable. As shown in https://fred.stlouisfed.org/series/T10Y3M https://fred.stlouisfed.org/series/T10Y3M that is no longer a true statement and that bet failed. It was a true statement for about 15 years with one flirtation in August of 2019. It appears that this is is more than a flirtation and more of a dip than past events have been. The bonds are as secure as ever - just that more money can be made faster in something other than the 10 year bonds. If (and that's two letters with a lot of weight) we had continued the tech growth seen in the early part of the pandemic and money flowing into SVB, their plan would have worked (or worked better at least), but they failed to account for the possibility that interest rates would go up and that people would be hesitant to fund startups and the startups would be taking money out for payroll faster than they put it in from new rounds of funding.

pg314 4y ago
> The bonds are worth exactly what they thought they'd be worth if held. That's wrong. A 10 year treasury bond with a .60% you bought in august 2020 is now worth significantly less. Whether you hold it or not is irrelevant. If you disagree, I'm willing to give you one, if you give me a 7 year treasury bond at the current interest rate of 3.86%.
- shagie 4y ago
  Has the amount that it pays when it reaches maturity changed? The yield curve has gone negative - the shorter term bonds are worth more than the longer term ones (and certainly the longer term ones bought back in 2021). And if you were trying to sell me a 10 year note at 0.6% I'd want a serious discount because even your 7 year note at 3.86%, I can do better with a 3 month note at 4.794% or a 6 month note at 5.086%. https://www.marketwatch.com/investing/bond/tmubmusd03m?countrycode=bx https://www.marketwatch.com/investing/bond/tmubmusd03m?count... But that's if you were trying to sell it now. The amount it will pay at maturity remains unchanged and in 10 years it will be worth exactly the same no matter what the financial history that brought it to that point was.