For government securities is there a reason why the US government / fed can’t just buy them off the banks at the “denominated price” or issue a bridge loan that would be repaid when they mature?
It’s still better than to force banks into a liquidity crisis and have to bail them out…
The Fed must have calculated the exposure of financial institutions to US government bonds when it planned its interest hikes and it should’ve made contingencies otherwise there is a pretty big regulatory failure here.
Yes institutions should hedge interest risk like any other risk however there is still a limit to hedging.
This isn’t banks betting the house on black jack and hookers these bonds were supposed to be the safest place to park your money under any other circumstances.
As for what price would the fed or who ever buy them back? Well if they can exercise a call provision it would just paying the value of the bonds + the coupon before maturity.
Many bonds come with this provision so companies can repay their debt earlier if market conditions change and allow them to borrow money under better terms.
From my understanding it was too late to do this with SVB as they had already realized substantial losses however not stepping in now and having more banks default would be quite silly.
The financial world is flooded with US dollars as a result of previous QE which is why they are (were) trying for QT now.
The only thing that changed is the market value of these securities since people have other safe places to put their money in for even better returns due to the interest rate hike.
So this would be the government either repaying the loan early or issuing a new loan as a bridge which when repaid would bring the balance back to zero there is no need to create new money here.
It's literally QE. Like, it's the textbook definition of quantitative easing. Where the government buys back bonds it gave out without taking into account the current interest rate. The government is giving banks more money than the bonds are worth, raising their prices. That's QE.