3 ms·

It's a real loss, just not a realized loss. If your house burns down, you've lost the value of the building even if you haven't sold the land yet.

chii 4y ago
but it hasn't been burnt down yet. A better analogy is that of a tree. You expect your planted tree (sapling) to be fully grown by 10 yrs time, and right now it's a sapling. Unfortunately, more recently planted saplings are growing up faster, and thus, result in more wood (presumably it's grown for wood) earlier than your sapling planted a few yrs ago. Therefore, a sapling from a few yrs ago is not worth as much future wood _right now_. But if you waited for the sapling to finish growing, you'd get back the amount of wood you originally expected. but if you chopped the sapling down today for the wood, you'd get far less.
- amluto 4y ago
  And since you bought that tree by borrowing money at a variable and now higher rate, you need more wood to break even.
- hattmall 4y ago
  But you have to balance the idea of should you cut your sapling down and use the space to plant the faster growing trees because you will ultimately get more wood. Those failing now are the groups that didn't cut the trees soon enough. It's a competitive environment and even faster growing trees may be coming. Waiting is not a viable option in many cases.
mym1990 4y ago
But it isn't because the full value of the bonds will be received at maturity, so all they have to do is avoid a bank run for 8 or so years.
Arainach 4y ago
How is it a real loss? Bonds have terms. If the bank sits on the bond until its term of maturity it gets a certain amount of money. Let's say the bond at maturity is worth X. The bank says the bond is worth Y. The market says the bond is worth Z. If Y > Z, that's only a problem if you sell. There is no loss - realized or unrealized - if you hold to maturity unless Y > X. However, how could this ever be the case? No one would pay more than X, so the bank could never claim the market value was higher.
- rileymat2 4y ago
  However, they are dependent on the returns to offer banking customers interest, if there are other ways for customers to earn enough interest to change banks, it will force the sale of the the bond at the loss. And, it repeats itself, realized losses, followed by customer uncertainty, followed by more withdrawals.
- light_hue_1 4y ago
  You're confused about how bonds work and about opportunity costs. You're assuming that the banks bought the bonds for their face value. Banks buy bonds for their price, not face value. The Treasury, for example, auctions their bonds so their price might never have been their face value. People of course pay more than the face value for a bond (what you call X)! One reason is because bonds pay interest; although this can happen in other rare situations when you willingly get a negative interest. But that's not even the main problem. If you hold the bond to maturity you have an asset that pays back i% in interest. But now you can get an equally risk-free asset that pays back j% of interest. Where j is far larger than the i that your bond is giving you. You are losing money by being forced to hold this bond. When you get into a situation where you are better off selling the asset and buying a new one because of the interest rate difference, well, there you go, that's a real loss. Literally there's a course of action where your bank's balance sheet would be much bigger than where it is heading now. It's just an unrealized loss at the moment because people aren't pulling the trigger.
  - admax88qqq 4y ago
    > You are losing money by being forced to hold this bond. Not making as much money as you could be is not the same as losing money.
eloff 4y ago
Except you don’t have to take a loss if you don’t have to sell. If you can hold it to maturity, you get all your money back. It’s only really an issue if you’re forced to liquidate early, and the fed is allowing you to loan the assets out at par value - which will help a lot on that front. On the other hand some banks have asserts that don’t count under that program - they could be in trouble if there’s enough pressure on them. Effective interest rates dropped like a rock today, the most since 1983 on the two year treasury. And the fed is likely to be a lot more dovish next week. That will help. I don’t have a crystal ball, but I think the worst of the danger has passed. I loaded up on regional banks today.
- gruez 4y ago
  > Except you don’t have to take a loss if you don’t have to sell. If you can hold it to maturity, you get all your money back. Sure, you get your principal back as well as the promised interest, but you lost out on the opportunity cost of being able to do something else with the money (ie. investing in current bonds that pay 2x-3x more). It's a loss by another name.

chii 4y ago

but it hasn't been burnt down yet. A better analogy is that of a tree. You expect your planted tree (sapling) to be fully grown by 10 yrs time, and right now it's a sapling. Unfortunately, more recently planted saplings are growing up faster, and thus, result in more wood (presumably it's grown for wood) earlier than your sapling planted a few yrs ago. Therefore, a sapling from a few yrs ago is not worth as much future wood _right now_. But if you waited for the sapling to finish growing, you'd get back the amount of wood you originally expected. but if you chopped the sapling down today for the wood, you'd get far less.

amluto 4y ago
And since you bought that tree by borrowing money at a variable and now higher rate, you need more wood to break even.
hattmall 4y ago
But you have to balance the idea of should you cut your sapling down and use the space to plant the faster growing trees because you will ultimately get more wood. Those failing now are the groups that didn't cut the trees soon enough. It's a competitive environment and even faster growing trees may be coming. Waiting is not a viable option in many cases.

mym1990 4y ago

But it isn't because the full value of the bonds will be received at maturity, so all they have to do is avoid a bank run for 8 or so years.

Arainach 4y ago

How is it a real loss? Bonds have terms. If the bank sits on the bond until its term of maturity it gets a certain amount of money. Let's say the bond at maturity is worth X. The bank says the bond is worth Y. The market says the bond is worth Z. If Y > Z, that's only a problem if you sell. There is no loss - realized or unrealized - if you hold to maturity unless Y > X. However, how could this ever be the case? No one would pay more than X, so the bank could never claim the market value was higher.

rileymat2 4y ago
However, they are dependent on the returns to offer banking customers interest, if there are other ways for customers to earn enough interest to change banks, it will force the sale of the the bond at the loss. And, it repeats itself, realized losses, followed by customer uncertainty, followed by more withdrawals.
light_hue_1 4y ago
You're confused about how bonds work and about opportunity costs. You're assuming that the banks bought the bonds for their face value. Banks buy bonds for their price, not face value. The Treasury, for example, auctions their bonds so their price might never have been their face value. People of course pay more than the face value for a bond (what you call X)! One reason is because bonds pay interest; although this can happen in other rare situations when you willingly get a negative interest. But that's not even the main problem. If you hold the bond to maturity you have an asset that pays back i% in interest. But now you can get an equally risk-free asset that pays back j% of interest. Where j is far larger than the i that your bond is giving you. You are losing money by being forced to hold this bond. When you get into a situation where you are better off selling the asset and buying a new one because of the interest rate difference, well, there you go, that's a real loss. Literally there's a course of action where your bank's balance sheet would be much bigger than where it is heading now. It's just an unrealized loss at the moment because people aren't pulling the trigger.
- admax88qqq 4y ago
  > You are losing money by being forced to hold this bond. Not making as much money as you could be is not the same as losing money.

eloff 4y ago

Except you don’t have to take a loss if you don’t have to sell. If you can hold it to maturity, you get all your money back. It’s only really an issue if you’re forced to liquidate early, and the fed is allowing you to loan the assets out at par value - which will help a lot on that front. On the other hand some banks have asserts that don’t count under that program - they could be in trouble if there’s enough pressure on them. Effective interest rates dropped like a rock today, the most since 1983 on the two year treasury. And the fed is likely to be a lot more dovish next week. That will help. I don’t have a crystal ball, but I think the worst of the danger has passed. I loaded up on regional banks today.

gruez 4y ago
> Except you don’t have to take a loss if you don’t have to sell. If you can hold it to maturity, you get all your money back. Sure, you get your principal back as well as the promised interest, but you lost out on the opportunity cost of being able to do something else with the money (ie. investing in current bonds that pay 2x-3x more). It's a loss by another name.