Quote (Malopox @ Oct 19 2023 04:37pm)
My understanding is that these losses are basically a result of marking to market longer dated securities which are extremely sensitive to rates rises as they should be due to the nature of bond math and discounted cashflows. They didn’t “lose” money due to bankruptcy - its just the nature of accounting underlying assets which are rate sensitive. This
will gradually normalize as maturing treasuries will be reinvested into higher yielding ones.
I also understand that a lot of countries that historically “recycled” their trade balances into US treasuries have embarked on significant domestic infrastructure projects channeling their excess funds into building bizzaroworld places like NEOM, war with Ukraine or commodities (iron, steel etc) for domestic infrastructure in China.
A better question would be the stability of the banking sector should unrealized losses in mortgages and HTM assets need to be crystallized in a liquidity run which can quickly turn into solvency issues (eg SVB). Will BTFP be enough for the next round of illiquidity events?
https://i.imgur.com/PfeP2sE.jpgYou're right that these losses are only realized when the security is sold. The problem with old people or people close to retirement is vast majority of their 401k would be held in historically 'safe' bonds. In the US we have these things called target date funds that a lot of 401k programs use, where basically as you get older they rebalance into a more conservative mix. So when you're like 30 the stock-bond mix is maybe like 80-20 or 70-30 and by the time you retire it's basically flipped.
Now when you start drawing down on your nest egg (after 60), your portfolio is probably mostly in bonds. So the 60+ year old's drawing down now you are realizing those losses as the mutual fund or pension fund basically has to redistribute.
The problem with assuming you can just hold these to maturity is most are very long dated so if you are going through turbulence in your life you may need to liquidate your bond positions, it's true at the personal and company level. Banks have access to programs like BTFP or FHLB funding where they can pledge these bonds but still having to hold some of these for 5,10,15 years really constrains your flexibility.
I should of been more specific though, it's not the fair value losses that are the biggest worry, it's the fact that so much debt is maturing both corporate and government that needs to be rolled. During the last 10 years companies enjoyed cheap debt and have taken huge leverage, so what happens when huge debt tranches mature and you have to basically now finance debt at 6, 7, 8, 10% when previously it was like 2-4%.
A lot of companies aren't ready for that, the US government is also not ready for that considering our debt is out out of control with rates literally going up almost every day. To me what happens with the government debt is much more alarming in the next 5 years.
This post was edited by ofthevoid on Oct 19 2023 08:47pm