Notice the risk free rate is based on short term bonds.
Those are not as sensitive to rate changes as they regularly reach maturity and you roll them over.
If SVB had owner those they would not have had liquidity problems which lead to insolvency.
If SVB had owner those they would not have had liquidity problems which lead to insolvency.
That is not why they are less sensitive to interest rates. They are less sensitive to interest rates because the value of a bond (assuming no coupon) is (whatever you get paid at maturity)^((1+rate)^(-time to maturity)). The sensitivity to rates increases exponentially with the time!
If you buy 30-year bonds, hold them to maturity then roll them over, and don’t mark to market, you are just taking the graph of your returns and heavily smoothing it. And the smoothing obscures a fascinating thing about bonds: they’re sensitive to rates both ways. When rates go up, existing bonds lose present value immediately, but they start to gain present value at the new higher rate forever, or at least until the next rate change or until you sell them or let them mature without rolling them over.
If you want to do an honest HTM forecast of SVB’s position, you need to project everything out to the same future time, say 10 years. So you’re looking at SVB’s portfolio, with a reasonable expectation (with error bars or confidence intervals) of returns over 10 years, in 2033 dollars. In this model, the value of SVB’s 10-year bonds didn’t change, but the value of its liabilities exploded: it needs to pay a lot more interest on its interest-bearing deposits, and customers (I assume) are a lot more likely to demand interest when rates are high.
It was a risky move but one that could have panned out if the deposits had remained.
It seems SVB didn't account for the fact that there was a strong correlation between the source of their money (tech propped up by low rates) and their investment risk (bonds/loans propped up by low rates).
I'm honestly unsure if we can ascribe this to to incompetence or greed.
You're borrowing at a lower yield to lend at the higher yield, and the risk is that you have to liquidate before the long one is mature.
Traders do this all the time, because every day you carry this position you're making the difference in yields.
The risk is always the same: the value of the things that give you the yield may change by enough to wipe out the interest difference.