Duration Risk

Higher rates mean falls in the price of assets with a long duration. 

Plenty of people, including, we now know, some of the stricken banks, effectively bet that rates would stay low forever by piling up on long-duration assets such as 10-year Treasuries. 

The longer this goes on, the more banks’ solvency, and not just their liquidity, may be called into question. 

The poster child for long-duration assets is the Austrian government’s “century bond

John Authers Bloomberg 23 mars 2023

https://www.bloomberg.com/opinion/articles/2023-03-23/rocky-horror-fed-show-stuck-in-a-time-warp-with-janet-and-jerome

All the clever clogs at the Californian bank seem to have focused their energy on the sexy business of lending to venture capitalists, rather than the boring trade of deciding where you can safely park your depositors’ cash.

Buying long-term fixed-rate government bonds when you have short-term floating-rate liabilities is a very basic mismatch — so basic that everyone in finance assumed it could not happen again

John Micklethwait and Adrian Wooldridge Bloomberg 22 mars 2023

https://englundmacro.blogspot.com/2023/03/a-new-chapter-of-capitalism-idea-that.html

SVB’s Collapse Shows the World’s Favorite Safe Asset Isn’t Risk-Free

US Treasuries came back to haunt investors and bankers who ignored the basics of interest-rate risk—and there could be more surprises in store.

Bloomberg 29 March 2023

https://www.bloomberg.com/news/articles/2023-03-29/svb-collapse-shows-us-treasuries-aren-t-a-risk-free-asset

SVB Gives Bond Investors a Stark Lesson in Term Risk

The danger with lending for longer is that when interest rates rise, bonds decline in value

 — and the longer a bond’s term, the greater the decline. 

It’s simple math: If you own a 10-year Treasury bond yielding 2%, which is roughly where yields were a year ago, and yields rise to 3.5%, which is where they are now, no one will want your lowly 2% bond unless you sell it at a deep discount. 

That’s precisely the scenario SVB faced when fleeing depositors demanded their cash.  

Personal Finance: SVB Gives Bond Investors a Stark Lesson in Term Risk - Bloomberg