If store inflation is 8% a year, what should the average new bond interest rate be?
The interest rate depends on a number of things. Risk is the primary item. Treasuries are still low risk. The problem with banks right now isn’t the bond’s interest rate.
Banks and businesses in general need to declare securities on their balance sheet in three ways, Available For Sale (ASF), Held to Maturity (HTM) and Held for Trade (HFT). You can sell/trade bonds and make money from the delta of the purchase and sell price (or lose money). If you hold a bond to maturity you don’t lose, you get the terms of the bond.
The Fed has years of near zero/zero interest rates. That probably caused some complacency at SVB and other banks. They purchased treasuries to make a little interest and knowing that they could sell any time they needed cash at a relatively stable price. That’s for AFS bonds and better than keeping cash with no return. The problem is when the Fed raises interest rates, a bonds value decreases in trading. SVB’s AFS bonds lost so much value that they even got to the point of selling HTM bonds because the loss was less with some of the HTM bonds. They were upside down in their AFS bonds by 60%.
SVB should have known better. Interest rates were not going to stay zero forever. When inflation goes up, the Fed raises interest rates. The writing was on the wall. SVB should have dumped their AFS bonds at the first sight of increasing interest rates even if it was for a minor loss. That’s better than taking a huge loss when they had to sell HTM bonds.
There are other liquid assets that SVB could have put their cash in from an early sale of AFS bonds. But apparently they were not into cutting their loses early and staying in business. Imagine being billions of dollars upside down on a car. That’s where they were Friday.