[OrvalWintermute]

The overinvestment into US debt put them at extreme risk for interest rate related devaluation, which is exactly what happened.

Even if they were going to go heavy with US debt, investment professionals normally use bond laddering for with fixed income funds to reduce that interest rate risk to the portfolio. They did not even do basic laddering!

[onos]

Can anyone provide a link that carefully outlines this? Eg did they just recently buy a ton of ten year bonds? That would sound nuts as everyone knows rates are rising right now. Would love to see details.

[OrvalWintermute]

It wouldn't matter even if they weren't of the same maturities, since you'd have to buy bonds with better interest rates, and you'd want the capital outflow to be spaced out.

The mitigation to interest rate risk is by buying them spaced out so principal returns are being re-invested at changing rates, and you are never tied to a specific rate. https://www.investopedia.com/terms/b/bondladder.asp

Here you see https://www.cnn.com/2023/03/11/business/svb-bank-collapse-ex... their average yield at 1.79%

[onos]

Thanks that makes sense. What I was hoping to see was links to what specifically they did that was not smart. Eg did they really just buy a lot of bonds, not spacing it out?

[OrvalWintermute]

Bonds are normally priced at the current interest rate, then modified based on type e.g. higher yield for longterm bonds, and less yield for short term bonds.

Recently we've been in an inverted yield curve where short term yield was superior to longterm yield.

The way I see it they did a few things wrong:

1 - bought too much of the same instrument (diversity)

2 - did not bond ladder (put themselves into a high risk situation)

3 - Moved unrealized risks into realized losses by fireselling bonds (bad timing which provoked liquidity crisis)

If you think about it, #1 & #2 were easily manageable. It is the colossal screwup of #3 on top of #1 & #2 that proved to be the coup de grace.

Whether the interest rates were going to increase or decrease was completely up in the air. No one knows after a few rate increases.

This is equivalent to selling at a loss a stock because it has a 3 - 6 month downtrend when the stock is still fundamentally sound, nothing has changed in the thesis instead of riding it out longer with the recognition you may not receive primo returns or even decent returns, but you won't be taking a big hit either.