More Than $16 Trillion Of Underwater Bonds Are Out There

[g5000]

We are in a massive bond bubble, and it is beginning to pop. Silicon Valley Bank and Signature Bank are only the beginning.

You can picture bond prices this way: The lower the interest rate a bond pays, the more expensive a bond is. The higher the interest rate it pays, the cheaper that bond is.

Thanks to the Federal Reserve, bonds have been extremely expensive since 2008. From 2015 to 2020, the Fed tried to bring the price of bonds back down, but then the pandemic hit and bonds became extremely expensive again.

This is what was called ZIRP. Zero Interest-Rate Policy. The Fed kept ZIRP way past the point they should have. The initial "quantitative easing" was to save the economy during the Great Recession. But once the recession was over, the Fed kept ZIRP around, and that is where they really fucked us. Especially savers.

The Obama and Trump administrations took full advantage of ZIRP. Since it was really cheap to borrow money, they borrowed $16 trillion.

Corporations also went on a massive borrowing spree since they could borrow money cheaply, too.

Bond bubble.

If you are an investor who is required by your by-laws to buy only investment-grade bonds, then you aren't very happy about this. Investment grade bonds were extremely expensive.

To get any kind of decent returns, you had to buy astronomical quantities of these expensive bonds.

If you aren't required to buy investment-grade products, then the temptation to invest in riskier and riskier products is just too overwhelming to resist. And that's what a lot of investors have done.

The thing about being able to borrow money cheaply is that you end up borrowing more than you should and spending it on stupid shit. Our federal government did that, and corporations did that, and colleges did that.

Another incentive for the federal government to borrow a lot of money and spend it on stupid shit is that government spending is a significant part of GDP. So spending a lot of money on stupid shit is a great way to artificially juice GDP growth as you borrow and spend, borrow and spend, borrow and spend.

Nevertheless, all the printed money was moving around pretty slowly. It wasn't really heating up our economy the way our big spenders were hoping it would.

I have likened the sluggishness to borrowing a trillion dollars and burying it in your backyard. As long as it is buried, it isn't contributing to inflation.

Then the pandemic hit, and the economy ground to a halt. Money was not moving around at all.

Once the pandemic passed and the markets opened back up, consumer demand boiled over to record levels. Money began flying around at a rapid clip. Those trillions of dollars buried in the back yard were dug up and put into action.

GDP surged, and inflation took off.

The President can't stop inflation. Pretty much only the Fed can. And the only tool they have in their tool box is to raise interest rates.

Suddenly, bonds are cheap!

The fallout from this is that all those old expensive bonds are now underwater. Just like all those mortgages people had in 2008 were underwater when house prices fell.

Investors are sitting on $16 trillion of underwater government bonds, plus however many underwater corporate bonds there are.

And this isn't just a US problem. It's a global problem. All that old sovereign and corporate debt planet-wide is underwater.

SVB is the canary in the coal mine. After parts of Dodd-Frank were repealed in 2018, they went on a bond buying spree. They increased their sovereign and corporate debt by 158 percent in a single year!

If your mortgage is underwater, you won't have a problem so long as you can keep paying your mortgage. But if your mortgage resets to a higher monthly payment, as it did for tens of millions of Americans, then you are screwed. You go belly up.

That is the picture all those bond holders are facing now.

 

[Harpy Eagle]

Thanks for the post

 

[g5000]

 

[gipper]

We are in a massive bond bubble, and it is beginning to pop. Silicon Valley Bank and Signature Bank are only the beginning.

You can picture bond prices this way: The lower the interest rate a bond pays, the more expensive a bond is. The higher the interest rate it pays, the cheaper that bond is.

Thanks to the Federal Reserve, bonds have been extremely expensive since 2008. From 2015 to 2020, the Fed tried to bring the price of bonds back down, but then the pandemic hit and bonds became extremely expensive again.

This is what was called ZIRP. Zero Interest-Rate Policy. The Fed kept ZIRP way past the point they should have. The initial "quantitative easing" was to save the economy during the Great Recession. But once the recession was over, the Fed kept ZIRP around, and that is where they really fucked us. Especially savers.

The Obama and Trump administrations took full advantage of ZIRP. Since it was really cheap to borrow money, they borrowed $16 trillion.

Corporations also went on a massive borrowing spree since they could borrow money cheaply, too.

Bond bubble.

If you are an investor who is required by your by-laws to buy only investment-grade bonds, then you aren't very happy about this. Investment grade bonds were extremely expensive.

To get any kind of decent returns, you had to buy astronomical quantities of these expensive bonds.

If you aren't required to buy investment-grade products, then the temptation to invest in riskier and riskier products is just too overwhelming to resist. And that's what a lot of investors have done.

The thing about being able to borrow money cheaply is that you end up borrowing more than you should and spending it on stupid shit. Our federal government did that, and corporations did that, and colleges did that.

Another incentive for the federal government to borrow a lot of money and spend it on stupid shit is that government spending is a significant part of GDP. So spending a lot of money on stupid shit is a great way to artificially juice GDP growth as you borrow and spend, borrow and spend, borrow and spend.

Nevertheless, all the printed money was moving around pretty slowly. It wasn't really heating up our economy the way our big spenders were hoping it would.

I have likened the sluggishness to borrowing a trillion dollars and burying it in your backyard. As long as it is buried, it isn't contributing to inflation.

Then the pandemic hit, and the economy ground to a halt. Money was not moving around at all.

Once the pandemic passed and the markets opened back up, consumer demand boiled over to record levels. Money began flying around at a rapid clip. Those trillions of dollars buried in the back yard were dug up and put into action.

GDP surged, and inflation took off.

The President can't stop inflation. Pretty much only the Fed can. And the only tool they have in their tool box is to raise interest rates.

Suddenly, bonds are cheap!

The fallout from this is that all those old expensive bonds are now underwater. Just like all those mortgages people had in 2008 were underwater when house prices fell.

Investors are sitting on $16 trillion of underwater government bonds, plus however many underwater corporate bonds there are.

And this isn't just a US problem. It's a global problem. All that old sovereign and corporate debt planet-wide is underwater.

SVB is the canary in the coal mine. After parts of Dodd-Frank were repealed in 2018, they went on a bond buying spree. They increased their sovereign and corporate debt by 158 percent in a single year!

If your mortgage is underwater, you won't have a problem so long as you can keep paying your mortgage. But if your mortgage resets to a higher monthly payment, as it did for tens of millions of Americans, then you are screwed. You go belly up.

That is the picture all those bond holders are facing now.

I read recently that there aren’t any ARMs in play. Fixed rate mortgages have been very low for a long time. Most homeowners have a low fixed rate mortgage, so no reset is forthcoming in this sector.

This isn’t true for commercial real estate loans. Many of those could default with the forthcoming rate hikes and low occupancy rates.

 

[g5000]

I read recently that there aren’t any ARMs in play. Fixed rate mortgages have been very low for a long time. Most homeowners have a low fixed rate mortgage, so no reset is forthcoming in this sector.

This isn’t true for commercial real estate loans. Many of those could default with the forthcoming rate hikes and low occupancy rates.

This is a bond problem, not a mortgage problem.

 

[g5000]

Here's what sank SVB:

Investment securities totaled $128.0 billion at December 31, 2021, an increase of $78.7 billion, or 159.5 percent, compared to $49.3 billion at December 31, 2020. Our investment securities portfolio is comprised of: (i) an AFS securities portfolio and a HTM securities portfolio, both of which represents interest-earning fixed income investment securities; and (ii) a non-marketable and other equity securities portfolio, which represents primarily investments managed as part of our funds management business, investments in qualified affordable housing projects, as well as public equity securities held as a result of equity warrant assets exercised. The major components of the change in investment securities are explained below.


Inline XBRL Viewer


See page 66. You can see a massive increase in their bond holdings in 2021.

 

[g5000]

The Fed’s fight against inflation just got downgraded​

​

Wall Street, which until a few days ago expected the Fed to raise interest rates by another half-percentage point this month, has sharply revised down its forecasts. Goldman Sachs economists on Sunday said they no longer expect the Fed to raise interest rates in March “in light of recent stress in the banking system.”

[snip]

“If they raise rates next week, I would be absolutely speechless,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities America. “Just last week the Fed was alluding to have to raise rates even higher, but this is a whole new situation. SVB is exacerbating what had already been a looming problem: The Fed was singularly focused on inflation, not recognizing that it would be prudent to sit and wait and see how things evolve.”

 

[wamose]

Without empirical evidence, I think this is a bunch of money-grubbing creeps robbing the American working man. After all, isn't that what government is?

 

[gipper]

This is a bond problem, not a mortgage problem.

True, but you brought up residential mortgages.

 

[CrusaderFrank]

Here's what sank SVB:

Investment securities totaled $128.0 billion at December 31, 2021, an increase of $78.7 billion, or 159.5 percent, compared to $49.3 billion at December 31, 2020. Our investment securities portfolio is comprised of: (i) an AFS securities portfolio and a HTM securities portfolio, both of which represents interest-earning fixed income investment securities; and (ii) a non-marketable and other equity securities portfolio, which represents primarily investments managed as part of our funds management business, investments in qualified affordable housing projects, as well as public equity securities held as a result of equity warrant assets exercised. The major components of the change in investment securities are explained below.


Inline XBRL Viewer


See page 66. You can see a massive increase in their bond holdings in 2021.

So what? That's one Ukrainian bailout

 

[CrusaderFrank]

Not sure how the OP hasn't figured out that massive government spending and borrowing causes inflation

 

[g5000]

True, but you brought up residential mortgages.

Only as an analogy to make the situation more easily understood.

 

[g5000]

Not sure how the OP hasn't figured out that massive government spending and borrowing causes inflation

You obviously did not read the OP.

Massive government spending and ZIRP.

 

[ThisIsMe]

We are in a massive bond bubble, and it is beginning to pop. Silicon Valley Bank and Signature Bank are only the beginning.

You can picture bond prices this way: The lower the interest rate a bond pays, the more expensive a bond is. The higher the interest rate it pays, the cheaper that bond is.

Thanks to the Federal Reserve, bonds have been extremely expensive since 2008. From 2015 to 2020, the Fed tried to bring the price of bonds back down, but then the pandemic hit and bonds became extremely expensive again.

This is what was called ZIRP. Zero Interest-Rate Policy. The Fed kept ZIRP way past the point they should have. The initial "quantitative easing" was to save the economy during the Great Recession. But once the recession was over, the Fed kept ZIRP around, and that is where they really fucked us. Especially savers.

The Obama and Trump administrations took full advantage of ZIRP. Since it was really cheap to borrow money, they borrowed $16 trillion.

Corporations also went on a massive borrowing spree since they could borrow money cheaply, too.

Bond bubble.

If you are an investor who is required by your by-laws to buy only investment-grade bonds, then you aren't very happy about this. Investment grade bonds were extremely expensive.

To get any kind of decent returns, you had to buy astronomical quantities of these expensive bonds.

If you aren't required to buy investment-grade products, then the temptation to invest in riskier and riskier products is just too overwhelming to resist. And that's what a lot of investors have done.

The thing about being able to borrow money cheaply is that you end up borrowing more than you should and spending it on stupid shit. Our federal government did that, and corporations did that, and colleges did that.

Another incentive for the federal government to borrow a lot of money and spend it on stupid shit is that government spending is a significant part of GDP. So spending a lot of money on stupid shit is a great way to artificially juice GDP growth as you borrow and spend, borrow and spend, borrow and spend.

Nevertheless, all the printed money was moving around pretty slowly. It wasn't really heating up our economy the way our big spenders were hoping it would.

I have likened the sluggishness to borrowing a trillion dollars and burying it in your backyard. As long as it is buried, it isn't contributing to inflation.

Then the pandemic hit, and the economy ground to a halt. Money was not moving around at all.

Once the pandemic passed and the markets opened back up, consumer demand boiled over to record levels. Money began flying around at a rapid clip. Those trillions of dollars buried in the back yard were dug up and put into action.

GDP surged, and inflation took off.

The President can't stop inflation. Pretty much only the Fed can. And the only tool they have in their tool box is to raise interest rates.

Suddenly, bonds are cheap!

The fallout from this is that all those old expensive bonds are now underwater. Just like all those mortgages people had in 2008 were underwater when house prices fell.

Investors are sitting on $16 trillion of underwater government bonds, plus however many underwater corporate bonds there are.

And this isn't just a US problem. It's a global problem. All that old sovereign and corporate debt planet-wide is underwater.

SVB is the canary in the coal mine. After parts of Dodd-Frank were repealed in 2018, they went on a bond buying spree. They increased their sovereign and corporate debt by 158 percent in a single year!

If your mortgage is underwater, you won't have a problem so long as you can keep paying your mortgage. But if your mortgage resets to a higher monthly payment, as it did for tens of millions of Americans, then you are screwed. You go belly up.

That is the picture all those bond holders are facing now.

So, what is the likely projection of where this will go?

 

[Missourian]

We are in a massive bond bubble, and it is beginning to pop. Silicon Valley Bank and Signature Bank are only the beginning.

You can picture bond prices this way: The lower the interest rate a bond pays, the more expensive a bond is. The higher the interest rate it pays, the cheaper that bond is.

Thanks to the Federal Reserve, bonds have been extremely expensive since 2008. From 2015 to 2020, the Fed tried to bring the price of bonds back down, but then the pandemic hit and bonds became extremely expensive again.

This is what was called ZIRP. Zero Interest-Rate Policy. The Fed kept ZIRP way past the point they should have. The initial "quantitative easing" was to save the economy during the Great Recession. But once the recession was over, the Fed kept ZIRP around, and that is where they really fucked us. Especially savers.

The Obama and Trump administrations took full advantage of ZIRP. Since it was really cheap to borrow money, they borrowed $16 trillion.

Corporations also went on a massive borrowing spree since they could borrow money cheaply, too.

Bond bubble.

If you are an investor who is required by your by-laws to buy only investment-grade bonds, then you aren't very happy about this. Investment grade bonds were extremely expensive.

To get any kind of decent returns, you had to buy astronomical quantities of these expensive bonds.

If you aren't required to buy investment-grade products, then the temptation to invest in riskier and riskier products is just too overwhelming to resist. And that's what a lot of investors have done.

The thing about being able to borrow money cheaply is that you end up borrowing more than you should and spending it on stupid shit. Our federal government did that, and corporations did that, and colleges did that.

Another incentive for the federal government to borrow a lot of money and spend it on stupid shit is that government spending is a significant part of GDP. So spending a lot of money on stupid shit is a great way to artificially juice GDP growth as you borrow and spend, borrow and spend, borrow and spend.

Nevertheless, all the printed money was moving around pretty slowly. It wasn't really heating up our economy the way our big spenders were hoping it would.

I have likened the sluggishness to borrowing a trillion dollars and burying it in your backyard. As long as it is buried, it isn't contributing to inflation.

Then the pandemic hit, and the economy ground to a halt. Money was not moving around at all.

Once the pandemic passed and the markets opened back up, consumer demand boiled over to record levels. Money began flying around at a rapid clip. Those trillions of dollars buried in the back yard were dug up and put into action.

GDP surged, and inflation took off.

The President can't stop inflation. Pretty much only the Fed can. And the only tool they have in their tool box is to raise interest rates.

Suddenly, bonds are cheap!

The fallout from this is that all those old expensive bonds are now underwater. Just like all those mortgages people had in 2008 were underwater when house prices fell.

Investors are sitting on $16 trillion of underwater government bonds, plus however many underwater corporate bonds there are.

And this isn't just a US problem. It's a global problem. All that old sovereign and corporate debt planet-wide is underwater.

SVB is the canary in the coal mine. After parts of Dodd-Frank were repealed in 2018, they went on a bond buying spree. They increased their sovereign and corporate debt by 158 percent in a single year!

If your mortgage is underwater, you won't have a problem so long as you can keep paying your mortgage. But if your mortgage resets to a higher monthly payment, as it did for tens of millions of Americans, then you are screwed. You go belly up.

That is the picture all those bond holders are facing now.

Appreciate this concise explanation.

It was extremely informative.

I was having trouble understanding how Treasury Bonds with a 1.78% return rate were losing money.

I was under the impression that no one wanted these bonds because as interest rates went up, new bonds were paying significantly higher returns...more than double what these bonds were paying.

Is there any truth to that notion...or am I way off?

 

[Missourian]

I read recently that there aren’t any ARMs in play. Fixed rate mortgages have been very low for a long time. Most homeowners have a low fixed rate mortgage, so no reset is forthcoming in this sector.

This isn’t true for commercial real estate loans. Many of those could default with the forthcoming rate hikes and low occupancy rates.

When interest rates shot up in the 70s under Carter, my folks had a very low interest rate. The lender offered them a buy out at an EXTREMELY reduced rate...as the lender was actually losing money on the account.

If the low interest bonds are losing money...the low interest mortgages will likely be losing money as well.

Important! Don't take this post as factual! This is just my extrapolation.

I don't know shit from shinola about macroeconomics.

 

[CrusaderFrank]

You obviously did not read the OP.

Massive government spending and ZIRP.

We've had ZIRP for a decade - worldwide and negligible inflation. What changed recently?

 

[Mac1958]

We are in a massive bond bubble, and it is beginning to pop. Silicon Valley Bank and Signature Bank are only the beginning.

You can picture bond prices this way: The lower the interest rate a bond pays, the more expensive a bond is. The higher the interest rate it pays, the cheaper that bond is.

Thanks to the Federal Reserve, bonds have been extremely expensive since 2008. From 2015 to 2020, the Fed tried to bring the price of bonds back down, but then the pandemic hit and bonds became extremely expensive again.

This is what was called ZIRP. Zero Interest-Rate Policy. The Fed kept ZIRP way past the point they should have. The initial "quantitative easing" was to save the economy during the Great Recession. But once the recession was over, the Fed kept ZIRP around, and that is where they really fucked us. Especially savers.

The Obama and Trump administrations took full advantage of ZIRP. Since it was really cheap to borrow money, they borrowed $16 trillion.

Corporations also went on a massive borrowing spree since they could borrow money cheaply, too.

Bond bubble.

If you are an investor who is required by your by-laws to buy only investment-grade bonds, then you aren't very happy about this. Investment grade bonds were extremely expensive.

To get any kind of decent returns, you had to buy astronomical quantities of these expensive bonds.

If you aren't required to buy investment-grade products, then the temptation to invest in riskier and riskier products is just too overwhelming to resist. And that's what a lot of investors have done.

The thing about being able to borrow money cheaply is that you end up borrowing more than you should and spending it on stupid shit. Our federal government did that, and corporations did that, and colleges did that.

Another incentive for the federal government to borrow a lot of money and spend it on stupid shit is that government spending is a significant part of GDP. So spending a lot of money on stupid shit is a great way to artificially juice GDP growth as you borrow and spend, borrow and spend, borrow and spend.

Nevertheless, all the printed money was moving around pretty slowly. It wasn't really heating up our economy the way our big spenders were hoping it would.

I have likened the sluggishness to borrowing a trillion dollars and burying it in your backyard. As long as it is buried, it isn't contributing to inflation.

Then the pandemic hit, and the economy ground to a halt. Money was not moving around at all.

Once the pandemic passed and the markets opened back up, consumer demand boiled over to record levels. Money began flying around at a rapid clip. Those trillions of dollars buried in the back yard were dug up and put into action.

GDP surged, and inflation took off.

The President can't stop inflation. Pretty much only the Fed can. And the only tool they have in their tool box is to raise interest rates.

Suddenly, bonds are cheap!

The fallout from this is that all those old expensive bonds are now underwater. Just like all those mortgages people had in 2008 were underwater when house prices fell.

Investors are sitting on $16 trillion of underwater government bonds, plus however many underwater corporate bonds there are.

And this isn't just a US problem. It's a global problem. All that old sovereign and corporate debt planet-wide is underwater.

SVB is the canary in the coal mine. After parts of Dodd-Frank were repealed in 2018, they went on a bond buying spree. They increased their sovereign and corporate debt by 158 percent in a single year!

If your mortgage is underwater, you won't have a problem so long as you can keep paying your mortgage. But if your mortgage resets to a higher monthly payment, as it did for tens of millions of Americans, then you are screwed. You go belly up.

That is the picture all those bond holders are facing now.

As I'm understanding this SVB mess, their unrealized bond losses poked them in the ass when this went south and they needed cash. They were pointing at their bonds (mostly MBSs, as I understand it) as being in the black via mark to maturity, and NOT mark to market. Moody's found that and was about to drop them TWO ratings levels when the shit hit the fan. Word got out before they could issue stock, and poof.

That's kind of a weird echo of the Meltdown, where people were thinking that real estate could never crash. Now, I also "saw somewhere" (grain of salt) that Dodd-Frank specifically allows for mark to maturity. For some reason. I'd like to know more about THAT one.

The CEO also cashed in his chips a while back and sold a shitload of stock, which sure sounds like frontrunning to me.

Elizabeth Warren (grain of salt) is saying that Trump's deregulation specifically opened the door for this. What have you seen?

 

[frigidweirdo]

We are in a massive bond bubble, and it is beginning to pop. Silicon Valley Bank and Signature Bank are only the beginning.

You can picture bond prices this way: The lower the interest rate a bond pays, the more expensive a bond is. The higher the interest rate it pays, the cheaper that bond is.

Thanks to the Federal Reserve, bonds have been extremely expensive since 2008. From 2015 to 2020, the Fed tried to bring the price of bonds back down, but then the pandemic hit and bonds became extremely expensive again.

This is what was called ZIRP. Zero Interest-Rate Policy. The Fed kept ZIRP way past the point they should have. The initial "quantitative easing" was to save the economy during the Great Recession. But once the recession was over, the Fed kept ZIRP around, and that is where they really fucked us. Especially savers.

The Obama and Trump administrations took full advantage of ZIRP. Since it was really cheap to borrow money, they borrowed $16 trillion.

Corporations also went on a massive borrowing spree since they could borrow money cheaply, too.

Bond bubble.

If you are an investor who is required by your by-laws to buy only investment-grade bonds, then you aren't very happy about this. Investment grade bonds were extremely expensive.

To get any kind of decent returns, you had to buy astronomical quantities of these expensive bonds.

If you aren't required to buy investment-grade products, then the temptation to invest in riskier and riskier products is just too overwhelming to resist. And that's what a lot of investors have done.

The thing about being able to borrow money cheaply is that you end up borrowing more than you should and spending it on stupid shit. Our federal government did that, and corporations did that, and colleges did that.

Another incentive for the federal government to borrow a lot of money and spend it on stupid shit is that government spending is a significant part of GDP. So spending a lot of money on stupid shit is a great way to artificially juice GDP growth as you borrow and spend, borrow and spend, borrow and spend.

Nevertheless, all the printed money was moving around pretty slowly. It wasn't really heating up our economy the way our big spenders were hoping it would.

I have likened the sluggishness to borrowing a trillion dollars and burying it in your backyard. As long as it is buried, it isn't contributing to inflation.

Then the pandemic hit, and the economy ground to a halt. Money was not moving around at all.

Once the pandemic passed and the markets opened back up, consumer demand boiled over to record levels. Money began flying around at a rapid clip. Those trillions of dollars buried in the back yard were dug up and put into action.

GDP surged, and inflation took off.

The President can't stop inflation. Pretty much only the Fed can. And the only tool they have in their tool box is to raise interest rates.

Suddenly, bonds are cheap!

The fallout from this is that all those old expensive bonds are now underwater. Just like all those mortgages people had in 2008 were underwater when house prices fell.

Investors are sitting on $16 trillion of underwater government bonds, plus however many underwater corporate bonds there are.

And this isn't just a US problem. It's a global problem. All that old sovereign and corporate debt planet-wide is underwater.

SVB is the canary in the coal mine. After parts of Dodd-Frank were repealed in 2018, they went on a bond buying spree. They increased their sovereign and corporate debt by 158 percent in a single year!

If your mortgage is underwater, you won't have a problem so long as you can keep paying your mortgage. But if your mortgage resets to a higher monthly payment, as it did for tens of millions of Americans, then you are screwed. You go belly up.

That is the picture all those bond holders are facing now.

Because of the system the US has, especially with presidents spending their first 4 years trying to get re-elected and their second 4 years not giving a damn, the House ALWAYS looking to getting re-elected and the Senate constantly having battles, the politicians are constantly looking to PUMP THE ECONOMY.

This causes so many problems. Boom and Bust. The rich people like it too. Every recession the rich get richer because they have money and the poor people don't. A poor person loses their job, they might lose their home to the banks and some rich person buys it up cheap, the bank makes money, the rich person makes money, the poor get poorer.

It's literally a way of squeezing money out of the poor and they don't even notice.

 

[Ralph Norton]

The lower the interest rate a bond pays, the more expensive a bond is. The higher the interest rate it pays, the cheaper that bond is.

That makes no sense. Please elaborate.