'This decade’s learning: bonds aren’t a universally safe asset class.' ...the US federal reserve are playing a dangerous game battling the inflation they enabled with rate hikes
http://www.brooock.com/a/svb-collapse-exposes-cracks-in-econ...
The purchase of 10 year bonds also implied a bet that faster maturing bonds won't be more valuable.
As shown in https://fred.stlouisfed.org/series/T10Y3M that is no longer a true statement and that bet failed. It was a true statement for about 15 years with one flirtation in August of 2019. It appears that this is is more than a flirtation and more of a dip than past events have been.
The bonds are as secure as ever - just that more money can be made faster in something other than the 10 year bonds.
If (and that's two letters with a lot of weight) we had continued the tech growth seen in the early part of the pandemic and money flowing into SVB, their plan would have worked (or worked better at least), but they failed to account for the possibility that interest rates would go up and that people would be hesitant to fund startups and the startups would be taking money out for payroll faster than they put it in from new rounds of funding.
That's wrong. A 10 year treasury bond with a .60% you bought in august 2020 is now worth significantly less. Whether you hold it or not is irrelevant. If you disagree, I'm willing to give you one, if you give me a 7 year treasury bond at the current interest rate of 3.86%.
The yield curve has gone negative - the shorter term bonds are worth more than the longer term ones (and certainly the longer term ones bought back in 2021).
And if you were trying to sell me a 10 year note at 0.6% I'd want a serious discount because even your 7 year note at 3.86%, I can do better with a 3 month note at 4.794% or a 6 month note at 5.086%. https://www.marketwatch.com/investing/bond/tmubmusd03m?count...
But that's if you were trying to sell it now. The amount it will pay at maturity remains unchanged and in 10 years it will be worth exactly the same no matter what the financial history that brought it to that point was.
This point is lost on everyone. They will get their money back, in 10 years. That's why it's a called 10 year note.
They messed up not considering they'd need the money sooner, and failed to seriously consider that no one would want to buy their notes if interest rates went up, because there would be much better deals out there.
They made a 10 year bet that interest rates wouldn't go up significantly. They bet wrong.
Note that Planet Money is intended more for accessibility and entertainment than hard hitting economic news... but they still get their facts right.
Wrong. You're forgetting about inflation. Interest rates increased because inflation spiked. In 2022 alone, that nominal payout at maturity has lost 8% of its real value.
However, it will still pay out exactly what it said it would pay out when it was purchased. Compare this to buying a stock in say... RBCN (went bankrupt and delisted in December) where any of the stock you had is worth nothing.
There is no risk that a bond won't pay out the amount that it says (other than the government really messing up and defaulting).
I will certainly be willing to say "a purchase of 10 year bonds would be short sighted and failed to account for possible risks from changing cash flow or increased rates over the next 10 years."
And yet a bond is still going to pay out what it says on the label when it was purchased when it pays out.
Now, if its not a hold to maturity type portfolio and you want to trade them, then its a whole 'nother ball game where prices will go up and down as it becomes easier or harder to make money in various markets. And whoever holds a $100 ten year note at ten years time will get paid exactly that amount.
'What this means going forward
An unintended side effect of the Federal Reserve’s rate hikes is that many banks and institutions are holding an unfathomable amount of low-yield debt that is now worth far less than it was a year ago. We went from a world where 100-Year Austrian bonds would pay only 0.39% yields, to one where we’re now concerned about 8-9% annual inflation, in just two years.
If institutions rightfully start deeming long-dated bonds to be a risky asset that isn't safe to hold on sensitive balance sheets, we could see bond premiums rise for these longer-dated bonds, raising the cost of capital for companies and governments alike...'
Not excusing their failure to properly account for duration risk, but regulators didn't see this coming either - what they were doing was considered to be not only wholly acceptable, but downright "safe".