[Zetice]

Sure, but the thing they bought also had almost no yield, so that's what I'm not understanding. Why is shitty 1% 10 year T notes "yield chasing"? Those sound absurdly secure, and apparently have lots of mechanisms by which you can borrow against them should you need to in almost any non-runlike scenario.

If the SVB bankers were "yield chasing" surely there were more effective ways of doing so at approximately the same risk.

[oarabbus_]

>Sure, but the thing they bought also had almost no yield, so that's what I'm not understanding. Why is shitty 1% 10 year T notes "yield chasing"?

Exactly. the 1-year notes had zero interest rate risk, and almost no yield. The 10-year notes offered very high interest rate risk (remember: rates were almost zero) and barely-more-than-no-yield.

Choosing 1.5% return at high interest rate risk vs. 0.5% return for low rate risk. Either way you are getting almost nothing, but one has the risk of putting you into a liquidity crisis. In a sense you're willing to risk it all to squeeze an extra 1%, It is the absolute definition of yield chasing.

>and apparently have lots of mechanisms by which you can borrow against them should you need to in almost any non-runlike scenario.

If your $1000 bond is worth $1005 at maturity, and it has dropped to $990 and you want to borrow from me against the bond, I will charge you at least $15 in this scenario. That's slightly oversimplified, but lenders (other than the Fed/QE) will loan at a rate where you're essentially locking in a loss, because they have what you need to offset your risk you failed to hedge against (liquidity).

>If the SVB bankers were "yield chasing" surely there were more effective ways of doing so at approximately the same risk.

Not that I am aware of, at that scale of money. There's also high-risk lending to borrowers (which SVB did) but companies might borrow $10M, $20M, maybe $100M. When you're talking $50-100B, Bonds are the only game in town.

[Zetice]

I honestly have no clue how to even research alternatives to the 10 year T note as an investment vehicle for SVB, but plenty of gigantic funds seem to be able to do all kinds of riskier investing so it doesn't seem like a fair question. There are tons of places to put money that are riskier, even billions, that would have yielded better returns.

30 year T notes, for example, seem to have been at double the 10 year notes in return at this time. Why not go for those if we're assuming greed as the driving factor here?

[oivey]

They aren’t a fund. They’re a bank. The alternative is exactly what GP just told you: a portfolio of bonds with varying maturity dates. Varying maturity dates reduces your risk in the case where you need to sell to get cash immediately because if interest rates go up, then you may have to sell at a loss. You may have to sell at a loss because it may be more profitable to buy a new bond than sit on your low interest bond, so you have to reduce the price of your bad bond to compete.

It really does seem like a ludicrous bet to be so invested in long term bonds at a moment of historically low interest rates. That’s why it reads like greed. SVB seemingly did very little to reduce the risk on that absurd bet.

[Zetice]

I still don't get why not 30 yr notes, though, if this really was just greed.

[mrguyorama]

Maybe the people who were stupid enough to lock up over half their balance sheet for ten years were smart enough to not do it for 30? Most financial people who take a stupid risk to chase yield don't think they are taking a stupid risk. They, through self delusion or other means, convince themselves it is a sure bet.

[kgwgk]

>> literally the only thing they could think of to do with the massive amount of money getting dumped in their lap

> There are tons of places to put money that are riskier, even billions, that would have yielded better returns

That there were many riskier alternatives doesn’t mean that there were no safer alternatives. (And by the way most of the riskier alternatives wouldn’t have actually yielded better returns in the last couple of years.)

[Zetice]

But it does mean that greed doesn't explain everything, which is my point.

[kgwgk]

If you don't think that the explanation for those investments into higher-risk higher-yield longer-term treasury bonds instead of, for example, lower-risk lower-yield shorter-term treasury bonds is that the yield was higher, what could it be?

Speculation that interest rates would go down and longer duration bonds would appreciate more?

Avoiding the hassle of managing a short-term portfolio to have more free time?

Taking risk for the sake of thrills?

[Zetice]

I don’t know! I’m asking here because it’s not clear to me what their thinking was, but none of the explanations people here are giving really make me feel like I understand. Is the argument that they were a very narrow set of greedy? Why not just a not narrow set of stupid?

[jjeaff]

1% is quite a bit when you are talking about this much money. That's $2B a year if you have $200B in AUM. They were probably trying to keep their yield up because without it, you can't offer competitive savings rates which could cause your depositors to trickle out to one of the many other banks that are offering a higher yield.

[anon84873628]

>They were probably trying to keep their yield up because without it, you can't offer competitive savings rates which could cause your depositors to trickle out to one of the many other banks that are offering a higher yield.

It sounds like this was the "right decision" in retrospect. If so much startup capital has been deposited into your bank that you can't safely steward it while turning a profit, it seems the only answer is to let that money go elsewhere.

Zeltice started this thread by asking, "why is this greed and not just incompetence?" It sounds like both. The corporate officers were stuck in a mindset of "we must keep growing and turning a profit" (greed) that they took the only option to do so, which led us to today (incompetence).