The greatest banking minds in the world didn’t realize buying bonds paying .5% interest would lose value when the Fed increased rates from 0% to 5%? What a bunch of morans. As long as they aren’t forced to sell these bonds, all is well. Extend and pretend. Sure would be tragic if there was a coordinated massive withdraw of deposits from these banks and they were forced to sell these bonds to satisfy depositors.
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They knew it was a possibility. They just never expected it to happen so fast, and as such, didn’t prepare for it as it would have affected profits.
MALPRACTICE. Plain and simple. Dow the road I believe it will become apparent there was criminal activity involving the CCP and Democrat Party, money laundering, payoffs etc. in some of these like SVB.
Bonds are hard for a lot of people to understand since the price moves inverse to yield.
Banks were buying long dated (10+ year) government bonds – mortgage backed securities, agency bonds, etc. not just Treasuries – at the low rates mentioned by Admin and paying minimal interest on saver’s deposits. This works in a 0% rate environment. Once the Fed started raising rates, short term Treasuries (4 wk – 1 yr) started ramping and banks now had serious competition for savings from money market funds and people buying T-bills (4 wk – 1 yr Treasuries) direct from Uncle Sam.
Banks were playing the “extend and pretend” game buying keeping the bonds that were worth less than face value (aka par) on their books at the full face value hoping they’d being able to hold them to maturity and actually get the full value. If you hold a bond to maturity, you get the full value, assuming the bond seller hasn’t gone bankrupt in the meantime. If you have to sell before maturity, you can make money (yields on new bonds are lower than what you’re selling) or lose money (yields are higher on new bonds than what you’re selling).
When depositors pulled money from banks to put in these other savings vehicles (money market funds, T-bills, etc.), banks may not have enough cash on hand to meet withdrawals and are forced to sell their now worth-less (not worthless) bonds at market value. This is how banks lose their ass and why a bank run (like what happened to Silicon Valley Bank) can cause a bank to go tits up overnight.
If I’d read your comment first, I wouldn’t have made mine, since I said the same thing, basically.
Fractional Reserve Banking.
Morans? Seriously?
Yeah Dumbass. Get a brain.
*”GET A BRIAN!”
FTFY
Morans for sure. And plenty of diversity hires in the mix, no doubt. When there are no consequences for stupidity, this is what we get. Bud Lite, anyone?
Your guy just bought Treasuries when rates are at 5%. So when rates decline, the bond value goes up. These banks bought Treasuries 3 years ago when they were paying .5%. The move UP to 5% has resulted in massive unrealized losses. The banks will only be killed if they are forced to sell their underwater bonds.
Easy. Just reduce national offense spending to zero.
The founders opposed a standing army. Besides all the mischief it emboldens, the cost is astronomical.
AP,
They key word in your question is “bills”. Bills have a duration of 4 to 52 weeks. “Notes” have durations of 2 to 10 years and “bonds” are 20 – 30 years. The longer the duration, the greater the interest rate risk. The banks bought longer duration instruments (when they should have bought T-bills) to eke out insignificantly higher yields. Picking up nickels in front of the steamroller, as they say. Mortgage-backed securities are even slipperier to assess than treasuries. When rates drop, people refinance out of the loans that secure the securities (aka “runoff”). So the duration shortens up and you don’t get the capital gain you would have on, say, a 10 Year Treasury Note. When (as now) rates rise, homeowners stay in their homes longer than previously expected, so the average duration of the MBS’s lengthens and your capital LOSS is greater than would have been expected by using the normal statistics about how long people stay in their homes. That’s part of why MBS’s yield more than Treasuries – because you never really know what you got.
Consider that loans held in a bank’s portfolio are similar. The rate risk comes from the duration. If they lend at, say, prime rate with no caps (like most home equity lines), they may have credit risk (of people not making their payments), but they don’t have any interest rate risk because whenever prime goes up, the HELOC rate goes up. If they’d stuck a bunch of 3.5% 30 year fixed mortgages in their portfolio back in 2021 (criminally stupid), those loans would be worth ~ 75-80 cents on the dollar now. Bankers used to know this shit.