SVB Gives Bond Investors a Stark Lesson in Term Risk
Treasuries are among the safest investments, but they’re not ironclad, especially when interest rates rise.
Not clueless, just careless.
Photographer: Justin Sullivan/Getty Images
It’s now clear that one reason Silicon Valley Bank failed is that it invested in riskier bonds than it could handle. It’s a “textbook case of mismanagement,” Federal Reserve Vice Chair for Supervision Michael Barr told Congress this week. That may be surprising to some people, given that the bonds in question included Treasuries and other government-backed loans, which are widely viewed as among the safest investments. It’s a useful lesson for individual investors about the risks lurking in bond portfolios.
No investment is risk-free, but the closest thing is probably short-term loans to the US government, also known as Treasury bills. That’s because the US government has vast resources to pay back its loans, and investors get their money back quickly. The problem is that it’s hard to make money without taking risk. Since 1926, one-month T-bills have returned 3.2% a year, barely above the rate of inflation.