The Federal Reserve raised rates at the fastest pace in decades to tame inflation, pushing its key policy rate from about zero to a range of 4.75% to 5%. Treasury prices spiralled downward, since bond prices move in the opposite direction of rates. That is only an immediate problem for someone who wants to sell a bond before it matures. Unfortunately for SVB, it fell into that category. Its clients, many of whom had much more than US$250,000 ($332,305) — the cap on federal deposit insurance — at the bank, got nervous and started yanking out their money. SVB could only sell Treasury holdings, as well as mortgage bonds backed by government agencies, at steep losses. The bank collapsed within days.
Look deeper into the latest US banking crisis, and the cause may come as a surprise to anyone still thinking in terms of the crash of 2008. It wasn’t dodgy loans to impecunious homebuyers that sank Silicon Valley Bank (SVB). It was a stash of what are thought to be the safest securities on Earth: US Treasuries.
Those loans to the government were, of course, entirely safe in a very important sense. Uncle Sam is going to be good for the cash. (Set aside an unforeseen disaster with the debt ceiling — more on which in a moment.) But the final repayment date of SVB’s bonds was typically years away. The problem is what happens to their price in the meantime. Purchased during a time of ultra-low interest rates, those long-maturity Treasuries were always liable to lose their immediate resale value if rates took off. Which they’ve done in a big way over the past year.
