6 ms·

Of note: those losses are actually coming down as we speak. With the Fed now expected by the bond market to pause rate hikes and start cutting rates soon, long

by arbuge 4y ago

Of note: those losses are actually coming down as we speak. With the Fed now expected by the bond market to pause rate hikes and start cutting rates soon, long term bond yields (as well as shorter term ones) have been coming down, increasing the value of those holdings. You may have noticed this decline if you were shopping for CDs over the last few weeks. On brokerage platforms, top rates for 1 year CDs have gone down from a high of around 5.4% to 5% now.

kccqzy 4y ago
What I have noticed is that CDs had lower yields than Treasury bills of the equivalent duration, until the bank runs happened. I think a lot of banks suddenly increased their CD rates just because they were also fearing a bank run. CDs lock in depositors' money a lot more. When the bank crisis subsided the CD rates went down because banks didn't feel a need to attract so many depositors. Disclaimer: I bought a 5.4% CD a few days after the collapse of SVB.
- khuey 4y ago
  There was also a flight to quality that pushed down t-bill (especially the 4 week) yields.
laweijfmvo 4y ago
The Fed has also agreed to buy the worthless bonds from banks, should they need cash, albeit they expect repayment @ 4-point-something %, which I understand banks immediately took advantage of. I guess we'll just deal with that problem later, as usual.
- loeg 4y ago
  The bonds aren't worthless. The important distinction of the new short-term Fed lending program is that the Fed loans against the face value of the bonds, rather than the market value.
  - laweijfmvo 4y ago
    Thank you for clarifying
- khuey 4y ago
  AFAIK, the Fed has agreed to lend banks cash on a short-term basis against their devalued (hardly worthless) bonds at par. If you have a source for the Fed agreeing to buy bonds I'd be very interested to read it, because AFAIK the Fed is selling close to $100B of bonds a month.
- JumpCrisscross 4y ago
  > Fed has also agreed to buy the worthless bonds from banks Not worthless, worth less. The Fed has always let banks borrow against Treasuries at the discount window. The discount is to their fair market value. They created a new mechanism, the BTFP, which lets banks borrow against the face value of their Treasuries at a higher rate [1]. [1] https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm https://www.federalreserve.gov/newsevents/pressreleases/mone...
alexb_ 4y ago
I hope not. Interest rates need to rise. Yes, you're gonna make some people lose a lot of money. But the economy cannot continue with inflation this high and we certainly do not want to go back into pre-2022 craziness where money is thrown around at complete nonsense because it's so cheap.
- welshwelsh 4y ago
  I'm a big fan of the high-inflation economy, we should go back to that. It seems to me that "inflation" is just another word for "worker power." It means there is low unemployment and lots of opportunities to hop to a higher paying job. It means you can work remotely and tell your boss to get stuffed if they want to RTO. Prices go up but if you play your cards right, you can increase your income by significantly more.
  - purpleblue 4y ago
    This is not true at all. The people most affected by high inflation are the lower-income people, who don't have flexibility. It's not always easy to just "find a new job". And salaries rarely are commensurate with inflation. Food inflation in the UK hit 18%, since when did low-income salaries go up that much? Spoiler alert: it doesn't and just leaves lower-income people in a deep hole.
  - TinyRick 4y ago
    It also means prices are higher. A significant portion of the population lives on fixed incomes or don't have the means to switch to a higher paying job, and were getting destroyed in the high inflationary environment.
nostrademons 4y ago
Also of note: this decline only continues as long as the Fed actually cuts rates. If they don't, these long-term bond yields make no sense (why would you lend money for 10 years at 3.5% when you can lend money for 3650 successive 1-day terms at 4.75%?) The logic behind this seems a bit circular to me. Market participants accept lower long-term bond rates because they expect the Fed to cut rates in the future. They expect the Fed to cut rates because if they don't, there will be a financial crisis. There will be a financial crisis because long-term bond rates are high and banks are underwater on their bonds, except that bond rates are declining because the Fed is going to cut rates, because...uh, why is there going to be a financial crisis again? What reason does the Fed have for dropping rates? It's very much an "appeal to consequences" fallacy - some bad outcome is not going to happen because that would be bad. The world doesn't work that way. IMHO the market is wrong, and the Fed is not going to cut rates. They've gotten too accustomed to being bailed out, and the Fed is on to them, and so they're not going to do that again, at least not in the form that the market expects.
- gerad 4y ago
  Because there’s no guarantee rates will stay at 4.75% for 10 years. Getting 4.75% for 1 year and then 0% for the next 9 years is objectively far worse than getting 3.5% for 10 years.
- akashshah87 4y ago
  This is not true. If the bonds are held to maturity, there are no losses.
  - naveen99 4y ago
    Opportunity costs of missing temporarily higher interest rates while bonds are locked up.
- rcme 4y ago
  The Fed is projecting rate cuts next year. As of March 22nd, the Fed is projecting a federal funds rate of 4.3 in 2024 and 3.1 in 2025, with 2.5 in the “longer run”. Hard to say the Fed won’t cut rates when their own projections have them cutting rates.
JumpCrisscross 4y ago
> the Fed now expected by the bond market to pause rate hikes and start cutting rates soon Both the bond and stock markets have been consistently wrong about this for the last year.
- arbuge 4y ago
  That may very well be so, but the price assigned to those holdings (from which the $620B figure is derived) is set by the bond market.
imwithstoopid 4y ago
who told you the Fed is going to cut rates? even the CNBC talking heads go only so far as to talk about a pause in rate hikes
mrfox321 4y ago
Some of those high coupon CDs came from really distressed banks (e.g. Zion) Your observation is likely over fitting to some of the CDs tied to risker banks.
- arbuge 4y ago
  No, not at all actually. I picked up several 5%+ 1-year CDs from Morgan Stanley, Wells Fargo, and Goldman Sachs myself.
BaseballPhysics 4y ago
Also these are mark to market losses, and banks typically hold bonds to maturity. The only time this is a problem is if the bank is in need of liquidity and a) reserve ratios are pretty conservative post-2008, and b) the Fed is providing vehicles to support short-term liquidity issues (this reducing the need to sell assets and realize losses). As long as banks, their customers, and/or the media aren't freaking out the client base and encouraging a run, this is a non-issue.

by arbuge 4y ago

kccqzy 4y ago

What I have noticed is that CDs had lower yields than Treasury bills of the equivalent duration, until the bank runs happened. I think a lot of banks suddenly increased their CD rates just because they were also fearing a bank run. CDs lock in depositors' money a lot more. When the bank crisis subsided the CD rates went down because banks didn't feel a need to attract so many depositors. Disclaimer: I bought a 5.4% CD a few days after the collapse of SVB.

khuey 4y ago
There was also a flight to quality that pushed down t-bill (especially the 4 week) yields.

laweijfmvo 4y ago

The Fed has also agreed to buy the worthless bonds from banks, should they need cash, albeit they expect repayment @ 4-point-something %, which I understand banks immediately took advantage of. I guess we'll just deal with that problem later, as usual.

loeg 4y ago
The bonds aren't worthless. The important distinction of the new short-term Fed lending program is that the Fed loans against the face value of the bonds, rather than the market value.
- laweijfmvo 4y ago
  Thank you for clarifying
khuey 4y ago
AFAIK, the Fed has agreed to lend banks cash on a short-term basis against their devalued (hardly worthless) bonds at par. If you have a source for the Fed agreeing to buy bonds I'd be very interested to read it, because AFAIK the Fed is selling close to $100B of bonds a month.
JumpCrisscross 4y ago
> Fed has also agreed to buy the worthless bonds from banks Not worthless, worth less. The Fed has always let banks borrow against Treasuries at the discount window. The discount is to their fair market value. They created a new mechanism, the BTFP, which lets banks borrow against the face value of their Treasuries at a higher rate [1]. [1] https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm https://www.federalreserve.gov/newsevents/pressreleases/mone...

alexb_ 4y ago

I hope not. Interest rates need to rise. Yes, you're gonna make some people lose a lot of money. But the economy cannot continue with inflation this high and we certainly do not want to go back into pre-2022 craziness where money is thrown around at complete nonsense because it's so cheap.

welshwelsh 4y ago
I'm a big fan of the high-inflation economy, we should go back to that. It seems to me that "inflation" is just another word for "worker power." It means there is low unemployment and lots of opportunities to hop to a higher paying job. It means you can work remotely and tell your boss to get stuffed if they want to RTO. Prices go up but if you play your cards right, you can increase your income by significantly more.
- purpleblue 4y ago
  This is not true at all. The people most affected by high inflation are the lower-income people, who don't have flexibility. It's not always easy to just "find a new job". And salaries rarely are commensurate with inflation. Food inflation in the UK hit 18%, since when did low-income salaries go up that much? Spoiler alert: it doesn't and just leaves lower-income people in a deep hole.
- TinyRick 4y ago
  It also means prices are higher. A significant portion of the population lives on fixed incomes or don't have the means to switch to a higher paying job, and were getting destroyed in the high inflationary environment.

nostrademons 4y ago

Also of note: this decline only continues as long as the Fed actually cuts rates. If they don't, these long-term bond yields make no sense (why would you lend money for 10 years at 3.5% when you can lend money for 3650 successive 1-day terms at 4.75%?) The logic behind this seems a bit circular to me. Market participants accept lower long-term bond rates because they expect the Fed to cut rates in the future. They expect the Fed to cut rates because if they don't, there will be a financial crisis. There will be a financial crisis because long-term bond rates are high and banks are underwater on their bonds, except that bond rates are declining because the Fed is going to cut rates, because...uh, why is there going to be a financial crisis again? What reason does the Fed have for dropping rates? It's very much an "appeal to consequences" fallacy - some bad outcome is not going to happen because that would be bad. The world doesn't work that way. IMHO the market is wrong, and the Fed is not going to cut rates. They've gotten too accustomed to being bailed out, and the Fed is on to them, and so they're not going to do that again, at least not in the form that the market expects.

gerad 4y ago
Because there’s no guarantee rates will stay at 4.75% for 10 years. Getting 4.75% for 1 year and then 0% for the next 9 years is objectively far worse than getting 3.5% for 10 years.
akashshah87 4y ago
This is not true. If the bonds are held to maturity, there are no losses.
- naveen99 4y ago
  Opportunity costs of missing temporarily higher interest rates while bonds are locked up.
rcme 4y ago
The Fed is projecting rate cuts next year. As of March 22nd, the Fed is projecting a federal funds rate of 4.3 in 2024 and 3.1 in 2025, with 2.5 in the “longer run”. Hard to say the Fed won’t cut rates when their own projections have them cutting rates.

JumpCrisscross 4y ago

> the Fed now expected by the bond market to pause rate hikes and start cutting rates soon Both the bond and stock markets have been consistently wrong about this for the last year.

arbuge 4y ago
That may very well be so, but the price assigned to those holdings (from which the $620B figure is derived) is set by the bond market.

imwithstoopid 4y ago

who told you the Fed is going to cut rates? even the CNBC talking heads go only so far as to talk about a pause in rate hikes

mrfox321 4y ago

Some of those high coupon CDs came from really distressed banks (e.g. Zion) Your observation is likely over fitting to some of the CDs tied to risker banks.

arbuge 4y ago
No, not at all actually. I picked up several 5%+ 1-year CDs from Morgan Stanley, Wells Fargo, and Goldman Sachs myself.

BaseballPhysics 4y ago

Also these are mark to market losses, and banks typically hold bonds to maturity. The only time this is a problem is if the bank is in need of liquidity and a) reserve ratios are pretty conservative post-2008, and b) the Fed is providing vehicles to support short-term liquidity issues (this reducing the need to sell assets and realize losses). As long as banks, their customers, and/or the media aren't freaking out the client base and encouraging a run, this is a non-issue.