Ed Dowd - look him up! Wall Street guru/statistician...pay attention.

Harveys 

Hi everyone HarveyS here. Can anyone please enlighten me as to the reason why all these very savvy intelligent banks and pension funds would invest funds in government 10,20 and 30 year bonds at zero interest rates,when even blind Freddy new that interest rates had only one way to go after reaching zero.This absolutely guaranteed that all these investments were guaranteed to be anything but safe.Who in their right mind would loan their money to someone for 30 years for nothing in return?These are the people who are in charge of the world.It doesn’t send a very good message to the average investor.So buckle up as I feel we are in for a very shaky ride,until we get more able and responsible people running the show.This is just my take on our world at this point in time.Am I being to critical.What are your thoughts?

With the exception of Covid, 30yr Treasury yields have been between 2 and 3.5% for most of the last 10 years. They were borrowing at zero and lending at those rates. "Free Money"! The ridiculous thing is they could have hedged a lot of this risk but most didn't.

>>@harveys<<
> Who in their right mind would loan their money to someone for 30 years for nothing in return? <

Well, I agree with you but there is the possibility that the fund manager wouldn't have a choice because of the so called mix of capital risk investment they have to offer (risky, safe, etc). So with the government 10,20 and 30 year bonds at zero interest rates the capital is still safe ... at maturity. So an investor that waits it out will get his capital back. Will that investor get the same purchasing power at maturity - at the current rate of inflation the answer is obviously no. The faulty thinking in my view lies with the investors that wanted / wants "safe" capital at maturity and saying it doesn't matter what the markets do in the interim. I guess, they haven't thought that inflation would skyrocket but who did? The funds, banks, etc. are somewhat screwed as soon as they have the obligation to do "mark to market" such as when they have to sell.

artisanpro 

The funds, banks, etc. are somewhat screwed as soon as they have the obligation to do "mark to market" such as when they have to sell.

Not an expert on this, but I gather that the Banks do not have to mark to market treasury securities that they plan to hold to maturity. I also gather that the problem at SIB & SVB was caused by the fact that due to a loss of deposits, they had to reduce assets/sell treasuries, hence realizing the loss (that they could previously hide/ignore) which then adversely effected their capital base.

Credit Suisse Bonds... with embedded put option/CDS/bomb!

SMCJB 

Not an expert on this, but I gather that the Banks do not have to mark to market treasury securities that they plan to hold to maturity. I also gather that the problem at SIB & SVB was caused by the fact that due to a loss of deposits, they had to reduce assets/sell treasuries, hence realizing the loss (that they could previously hide/ignore) which then adversely effected their capital base.

I have the same understanding and having to sell forces "mark to market" with consequences to their capital base as you mentioned.

SMCJB 

Credit Suisse Bonds... with embedded put option/CDS/bomb!

A "embedded bomb"? That is no bomb that is a bond placement. No one was forced to buy these kind of papers.

As Jeffrey Gundlach said: "Put on your big boy pants and look into the mirror".
Everyone was aware of the risks they were taking at all times. Now the risks are materializing they start to cry.
Maybe they only saw the high coupon. Look at CS's 9.75% (!) Perpetual Tier 1 bond. But that is now their problem.
The magic words are: "Risk Management".

AT1 write-down bonds cleary flagged the risk of a write-down event from day one of the bonds' issuance.


Source: Credit Suisse issuance document via BBG

@chasepatrol don't get me wrong, I'm not making excuses for anybody, I was highlighting the embedded option in the bond. 'Contingent Write-Down' is even in the Bond's Title!

😉


https://www.bloomberg.com/news/articles/2023-03-21/svb-s-loans-to-insiders-tripled-to-219-million-before-it-failed

From the Bloomberg Evening Briefing Email...

Pacific Investment Management and Invesco are among the largest holders of Credit Suisse’s so-called Additional Tier 1 bonds that were wiped out after the bank’s takeover by UBS. Inside Credit Suisse, things aren’t much better: The Swiss government said it’s temporarily suspending some bonus payments.

Currently the focus of a few investigations, it turns out now-deceased Silicon Valley Bank got very generous in its final months. As the lender deteriorated and regulators began detecting flaws in its risk management, SVB nevertheless opened up credit to one group: insiders. Loans to officers, directors and principal shareholders, and their related interests, more than tripled from the third quarter last year to $219 million in the final three months of 2022. That’s a record dollar amount of loans issued to insiders, going back at least two decades.