4 ms·

You are exactly describing what all of these banks did. What happens to the value of 4% bonds if interest rates go to 6%? What about if people want their money

by alexb_ 3y ago

You are exactly describing what all of these banks did. What happens to the value of 4% bonds if interest rates go to 6%? What about if people want their money back before the bond duration is up, so you have to sell the 4% bonds in a 6% environment?

jgilias 3y ago
Note that in this interest rate environment banks don’t need to buy bonds in order to get 4%. Currently the Fed’s reverse repo facility provides more than that.
- lazide 3y ago
  The issue is it takes years (decades) to stand up a new bank due to the extensive regulations, processes, etc. that need to happen - and who knows what is going to happen next year - let alone in that timeframe. The reason why we have such consolidation is that merely existing in the Byzantine world of banking regulations is nearly impossible, and only the largest entities can afford the legal, IT, trading/financial mojo, capital, etc. resources necessary for it to occur. The big 5 have not only such resources, but enough economic impact if they fail that they can force regulators to stop doing a regulation that would kill them. Which is ultimately where this is all going. Either nationalization (unlikely) or the big banks writing their own regs (in practice).
seanhunter 3y ago
The answer to your question is prices would go down until the yield on the bonds equals the market rate. Separate nerd note: I think you mean maturity not duration. The maturity of a bond is the point in the future when holders get back the principal. The duration of a bond is pretty much the first derivative of price with respect to rates expressed in years. Intuitively it's the number of years (on average) an investor in that bond would need to remain invested for the future value of cashflows from the bond to be equal to their investment in the bond. https://www.investopedia.com/terms/m/macaulayduration.asp https://www.investopedia.com/terms/m/macaulayduration.asp
throw2awaymay 3y ago
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by alexb_ 3y ago

jgilias 3y ago

Note that in this interest rate environment banks don’t need to buy bonds in order to get 4%. Currently the Fed’s reverse repo facility provides more than that.

lazide 3y ago
The issue is it takes years (decades) to stand up a new bank due to the extensive regulations, processes, etc. that need to happen - and who knows what is going to happen next year - let alone in that timeframe. The reason why we have such consolidation is that merely existing in the Byzantine world of banking regulations is nearly impossible, and only the largest entities can afford the legal, IT, trading/financial mojo, capital, etc. resources necessary for it to occur. The big 5 have not only such resources, but enough economic impact if they fail that they can force regulators to stop doing a regulation that would kill them. Which is ultimately where this is all going. Either nationalization (unlikely) or the big banks writing their own regs (in practice).

seanhunter 3y ago

The answer to your question is prices would go down until the yield on the bonds equals the market rate. Separate nerd note: I think you mean maturity not duration. The maturity of a bond is the point in the future when holders get back the principal. The duration of a bond is pretty much the first derivative of price with respect to rates expressed in years. Intuitively it's the number of years (on average) an investor in that bond would need to remain invested for the future value of cashflows from the bond to be equal to their investment in the bond. https://www.investopedia.com/terms/m/macaulayduration.asp https://www.investopedia.com/terms/m/macaulayduration.asp

throw2awaymay 3y ago

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