[guhcampos]

This whole discussion around bonds makes me feel like I'm either too stupid or too smart, because it does not make sense to me that SVB would not have any sort of hedging around government bonds?

I don't know much about US bonds, but Brazil issues 3 types of bonds: fixed rate, inflation-indexed floating rates and interest-indexed floating rates. It's common sense between investors you need to hold a mix of the 3 to hedge against macroeconomic changes, that way the term does not really matter that much: if inflation skyrockets, it's likely the government will increase interest rates to compensate, and so on.

Is it that much different in the US or has SVB simply failed to choose the bonds they bought carefully?

[rich_sasha]

Every bank in existence fundamentally borrows short-term at a low, floating rate, and lends back out long term at a higher rate. The lending rate can be fixed or floating.

This kind of thing is bank risk management 101. For example, in Europe, banks tend not to lend out long term at all at a fixed rate, precisely for reasons like this.

Broadly this is called "duration marching" IIRC, duration being the name of sensitivity to interest rates. Ideally a bank would have no duration risk - they don't care if rates are going up or down. You can achieve it with a variety of tools: IR swaps, issuing long-term deposits/bonds, floating rate loans etc.

You're right, if SVB in 2021 just bet the farm that interest rates will stay so low for a decade, this is basically moronic.

[Scoundreller]

> this is basically moronic.

No, it’s smart! If it works out, you cashout and go on the speaking circuit patting yourself on the back for your ygenius. If it doesn’t, you’ve limited your own liability and someone else comes in and cleans up your mess.

[jfengel]

The US does have inflation-indexed bonds, but they're only available in small amounts ($10k/year). They're for consumers, not institutions.

You can, however, buy bonds with varying maturity times. That's generally OK, since there's a liquid market in those bonds. They appear to have been caught flat footed by a sudden run.

[gruez]

> The US does have inflation-indexed bonds, but they're only available in small amounts ($10k/year). They're for consumers, not institutions.

You're thinking of I-bonds, but that's not the only inflation indexed bonds out there. There's also TIPS https://treasurydirect.gov/marketable-securities/tips/

[ThrustVectoring]

You only get paid to take on risk. If SVB hedged away the interest-rate risk that they take on by buying long-term bonds, they would no longer be taking on as much risk and thus no longer potentially earning as much profit.

[cezart]

Or so little profit, as in this particular turn of events

[marcosdumay]

AFAIK, variable rate bounds aren't common anywhere else. They are more of an inheritance of the hyperinflation times, and the government really hates them.

But people do love buying them, exactly because they never lose nominal value.

[bjornsing]

I'm not aware of any useful hedge for long term US government bonds. There are inflation protected bonds (TIPS), but they wouldn't have worked as a hedge in this case [1].

1. https://www.schwab.com/learn/story/treasury-inflation-protec...

[inconceivable]

there are interest rate swaps (insurance, basically) but i think there may be some kind of regulation against banks engaging in derivatives trading?

[twic]

The "Volcker Rule" bans banks from trading derivatives for profit, but they are allowed to use them for hedging.