[lackbeard]

It's well known that long-dated treasuries are highly volatile. I think the lesson we've all learned here is that they didn't have a viable business. It seems like they were offering a product that was not profitable given their competition and reasonable risk management.

[tptacek]

They're volatile if you trade them, right? But they're not volatile in the sense that there's uncertainty that they'll pay back. Do banks normally actively trade their long-dated bonds?

[basseq]

No, and that's the point. I understand that banks mark long-term bonds as hold-to-maturity (and only then can list them at par on their balance sheet). But they actually have to hold them. Otherwise, they have to mark them to market, and any sales of HTM bonds flip the entire tranche over to MTM.

So part of the problem is that SVB had a reasonable-looking balance sheet of HTM bonds, then had to sell some at market, which flipped their entire portfolio to MTM and destroyed their balance sheet.

E.g., a simple balance sheet:

  Assets                   Qty.   Par   Market   Total
  -----
  Mark To Market Bonds     10k    $1k   $0.8k    $8Mn
  Hold To Maturity Bonds   1M     $1k   $0.8k    $1Bn
  Total                                          $1.08Bn

But then let's say I have $16M of withdrawals. I sell all of my short-term bonds for $8M, but have to cover another $8M, so I sell another 10k bonds at market price.

But, oh shit, now all my long-term bonds have to be marked to market, so now my balance sheet looks like this:

  Assets                   Qty.   Par   Market   Total
  -----
  Mark To Market Bonds     990k   $1k   $0.8k    $792Mn
  Total                                          $792Mn

$16M of outflows have reduced the assets on my balance sheet by two hundred and sixteen million.

[lackbeard]

I guess that's what you normally do when you're overweighted that asset class and you must cover withdrawals!