> 2. Fed raises interest rates. Now new mortgages are shiny (they return more money) and those old mortgages are shitty, so now they are worth $75 ea. Normally not a problem as they can wait for those mortgages to mature and get $105.
It's not that new mortgages are shiny and old mortgages aren't; it's that $100 in 5 years (or whatever) is now worth less. It's easier with zero coupon bonds, because there's only the maturity, so a $100 zero coupon bond that matures on date X is worth $Y, regardless of when it was issued; and $100 mortgage that completes on date X needs to have each payment adjusted for current value. Clearly, a smaller series of payments is worth less than a larger series of payments, even though the principal amount is the same.
Yeah really its based on long-term t-bills and the risk premium.
Because safe interest rates went up, people can get a better deal on long term debt unless they get a discount on the bonds from SVB so that in the end the SVB bonds work out to a the current interest rates, if held to maturity.
This is how bond prices move opposite to the external interest rate environment.
There is also a risk premium since t-bills are considered perfectly safe, while these mortgage backed securities are likely now carrying a risk premium so buyers want an even higher effective interest rate out of them.
It isn't really new-vs-old, it is just the interest rate environment. If there was zero new issuance of debt people would still be trading the old debt at the same interest rates and the value of the bonds held by SVB still would have been underwater. Of course if there wasn't enough debt to satisfy the appetite for buying debt then the prices would rise and get bid up, but we'd see this as a lowering of interest rates in these markets (which isn't happening).
It's not that new mortgages are shiny and old mortgages aren't; it's that $100 in 5 years (or whatever) is now worth less. It's easier with zero coupon bonds, because there's only the maturity, so a $100 zero coupon bond that matures on date X is worth $Y, regardless of when it was issued; and $100 mortgage that completes on date X needs to have each payment adjusted for current value. Clearly, a smaller series of payments is worth less than a larger series of payments, even though the principal amount is the same.