> 10+ year duration, with a weighted average yield of 1.56%.
> the value of SVB’s MBS plummeted.
How much 'plummeting' did they do in numerical terms? Something with those kinds of yields doesn't sound like it ought to be a super risky asset. The mortgage lending market tightened up a lot after the great recession...right?
They're very safe assets, they just have a long duration which makes them really risky if you could need them to cover deposits.
To make things more straightforward, let's just compress it to a 1-year time frame vs a 30-day bond. So a $100 MBS at 1.5% would pay you $101.50 if you held it for 1 year. If you have $100 in deposits and a $100 MBS bond, you're "solvent". But what happens if after 30 days, your depositor asks for his $100 back? You either need to sell your MBS or find other money to pay them.
If you try to sell the MBS to pay that $100 deposit liability and interest rates are about the same as they were when you bought it, you'd likely get around $100 and things are okay. If however, rates have spiked since then (like they have here), investors can either buy your bond that pays 1.5% or they can buy a new issuance 1-year bond paying 4% or 5%, or perhaps a 30-day bond paying 1.5%. So you need to give them a discount in order to sell your bond -- in this case it might be upwards of 30% or 40%.
So if you sell your MBS, you'll only get $60 or $70 for it -- leaving you a huge shortfall that you need to makeup from your other reserves. If you could convince your depositor to leave his money in the bank until that bond matures, you'd be completely fine -- but the timing mismatch and interest rate spike just kills the bank.
I get how it'd put them in bankruptcy or whatever the precise term is for a bank. I'm just curious what it means in terms of people getting their money back. If their assets lost 10% of their value, I could see that being enough, combined with the bank run, to put them under. But if everything else gets sold off at 90 cents to the dollar, that's not awesome but it's not like "poof it's gone entirely" either.
> But if everything else gets sold off at 90 cents to the dollar, that's not awesome but it's not like "poof it's gone entirely" either
You answered your own question. People will very likely get most, or even all, of their money back, just after the gov is able to offload some of the assets. Problem is, if you're a startup, you can't just wait a few months for the cash to make payroll.
A bond with a 10-year yield of 1.56% has a price of $0.85 on the dollar. A bond with a 10-year yield of 4% has a price of $0.676 on the dollar. So if yields increase from 1.56% to 4%, the bond price falls by 21%.
That has to be an inflation adjusted yield, right? Why would anyone do anything remotely risky for such terrible returns? You can almost find government bonds with similar average yields.
Nope! I got a 2.0% mortgage in 2021 (no points or anything) and the bank then turned around and sold it to Freddie who paid them 1.7% (so the bank made a nice 0.3% just for originating the loan).
Then Freddie packed my loan and sold it to others for something likely to be below 1.7%...
The risky part is (or more precisely has happened to be) the 10+ year duration, more than the ~1% yield over treasuries (which may be too low to compensate for the additional risk but is not what has brought the bank down).
> the value of SVB’s MBS plummeted.
How much 'plummeting' did they do in numerical terms? Something with those kinds of yields doesn't sound like it ought to be a super risky asset. The mortgage lending market tightened up a lot after the great recession...right?