why do you think those bonds are worth only 80% now, if you believe they should be worth 100%? is it a market inefficiency? do you think you could make risk-free 25% profit by buying them?
It's material here because the reason Tbills are paying 5% is because inflation is roughly 6.5%. (I used a fixed inflation rate of 3% to get 74% above.) Usually they're down at like 0.05% or so, which is what SVB was holding, which is what sank them.
What matters is that principal is returned in full when bonds mature, but if you can’t wait until maturity you might have to sell them for less than the principal. That is exactly what happened to SVB.
Sounds like they needed more diversity in their overall capital portfolio; based on significant risk of these long-term bond rate increases -- is this a common tactic that would be employed at other banks, but it's just that SVB had a "special" system where customers would hold more money there or something?
What's stopping my Local Bank from crashing this week?
