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Comment by airstrike | Hacker News Reader

these are unrealized losses so not necessarily significant if just held to maturity or sold when prices are less punishing

they can be an issue if, say, all your depositors decide to make huge withdrawals and the bank's immediate cash needs balloon, or if they have specific payments they need to make in the near term which would force those "available for sale" securities to be actually sold

none of this is an inevitable risk. there are ways to hedge against rising rates. the current rate hikes, although historic in their pace, have also long been anticipated by the market and telegraphed by the Fed. that bank administrators failed to plan accordingly is honestly baffling

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Possible I am missing something, but your response appears to assume the securities will recover their loses prior to being sold and/or that these unrealized losses do become actual losses, should banks need to sell securities to meet liquidity needs.

Without additional context, seems like wishful thinking to believe such losses will ever be recovered. In fact, while I might be wrong, those unrealized losses assume current market conditions; meaning they do not represent the actual total assets at potentially at risk; might be wrong about this.

Am I missing something?

> Am I missing something?

Yes. As bonds get closer to their maturity date, the discount one would have to sell them at to garner a higher prevailing interest rate goes away. That is, the nominal loss "naturally" goes away over time. The article kind of explains this.

They are unrealized losses if the assets are sold at market. They are not losses if the assets are held to maturity.

They are bonds. Unless they default they will eventually reach maturity and pay out the original gain.

The problem is that might be a 20% gain 10 years from now, so nobody will be willing to buy that bond off of you for the price you paid since they can 40% on new 10 year bonds.

The only time a bond price decline is concerning is if you have to sell it rather than holding to maturity.

The point with bonds is that they'll "recover their losses" if you hold them to maturity.

Think about three time frames:

Year 0: I buy a new-issue $100 bond paying 1.5% interest for $100. I will receive $1.50 every year for 5 years and then get $100 back.

Year 3: Interest rates have increased pretty dramatically, so 2-year bonds are now paying 3% interest. So for someone 'shopping' for a bond that matures in 2 more years, they can buy a new-issue one paying 3% or they could buy my 5-year with 2-years remaining that is only paying 1.5%. Obviously they would buy the new-issue unless I offer a substantial price discount. So if I "mark to market" my bond, I would have to sell it for something like $85 to be equivalent to the new-issue debt. My bond is still paying 1.5% and will still pay $100 when it matures, but it's much less valuable since the interest stream is smaller. I don't sell my bond because I don't want to take the loss.

Year 5: My bond matures and I receive $100 along with the final interest payment.

We're talking about step 2 above -- the losses are only realized if you sell the instrument, so you don't need to "recover" any losses, the underlying debt is still as likely to pay out as they were before, it's just a debt maturity question.

Let's simplify and think about it like owning a stock. Maybe you bought it at $100 and it's now worth $80. If you were forced to sell it today, you would have a $20 loss. But you can wait for it to trade up.

Bonds have the added benefit of a guaranteed principal at maturity. So if you buy a bond with $100 face value, it will pay that to you at maturity plus some coupon (say, 4%) between now and then. For the sake of simplicity, let's assume the bond was issued at par (meaning not at a discount or premium), so you paid $100 for that $100 face value

As time goes by and interests rate fluctuate, the price of that bond in the open market will also vary. When interest rates go up, prices go down and yields go up, because investors demand a greater return (higher yield) and since the "4%" is hardcoded into the bond, the only way to give additional yield is by trading your otherwise $100 bond for, say, $98.

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