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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 t

by 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.

by mhb 4y ago

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.