The collapse of Silicon Valley Bank highlighted the risks posed by "underwater" long duration bonds -- particularly when those bonds funded with short-term liabilities.
Who else in the global economy holds a lot of underwater bonds?
Asian insurers and policy banks ...
1/
Who else in the global economy holds a lot of underwater bonds?
Asian insurers and policy banks ...
1/
To be sure, the associated risks depend as much or more on an institution's funding structure as on the size of the mark to market loss on bonds in hold to maturity portfolios.
As long as the funding (for SVB, big deposits) are there, losses don't need to be realized.
2/
As long as the funding (for SVB, big deposits) are there, losses don't need to be realized.
2/
Japan's insurers probably still have close to $700b in foreign bonds on their books; Taiwan's insurers have a comparable sum. These bonds in long-term portfolios that back promised payouts to holders of life insurance policies --
But they are heavily fx hedged ...
3/
But they are heavily fx hedged ...
3/
Those fx hedges have to roll roughly every 3ms, so the hedging creates a potential funding risk --
One that hasn't been realized -- in part because the hedges in Taiwan largely come from the CBC, and in part because the BoJ is credible USD lender of last resort as well.
4/
One that hasn't been realized -- in part because the hedges in Taiwan largely come from the CBC, and in part because the BoJ is credible USD lender of last resort as well.
4/
Japan's Post Bank, Norinchukin and the Shinkins collectively hold about $1 trillion in foreign bonds against, well, liablities that are mostly deposits ...
The bulk of those bonds are now underwater (they are in hold to maturity portfolios, so the loss hasn't been realized)
5/
The bulk of those bonds are now underwater (they are in hold to maturity portfolios, so the loss hasn't been realized)
5/
These institutions seem to have stable access to dollar funding -- they are government backed (directly or indirectly) and their yen deposit base is secure, and they haven't had any trouble rolling hedges.
6/
6/
But it is important to understand where risk is being warehoused in the global economy, and a lot of underwater USD fixed income is on "private" balance sheets outside of the US --
it is a direct consequence of Asia's bond buying spree from 14 to 20.
7/
it is a direct consequence of Asia's bond buying spree from 14 to 20.
7/
My operating hypothesis is that these bonds -- mostly held on a hedged basis -- won't be sold (so losses won't be realized, see SVB) but that they will roll off as the bonds (or the investment trust holding the bonds) matures ...
8/
ft.com/content/7adb80…
8/
ft.com/content/7adb80…
But that is a hypothesis not a certainty: it depends (as we were reminded this week) on the ability of certain institutions to sustain the funding structures (often based on rolling 3m hedges and often now negative carry) that allow the bonds to be held to maturity
9/9
9/9
"As long as the funding (for SVB, big deposits) [are] IS there,"
ugh -- always make mistakes at the start of a thread too
ugh -- always make mistakes at the start of a thread too
• • •
Missing some Tweet in this thread? You can try to
force a refresh
