The impact of rising interest rates on US #bonds , the potential consequences for #banks , and the broader implications for lending and borrowing in the US.
Key points are:
1. Impact of Rising Interest Rates on Bond Prices: When interest rates rise, the prices of existing bonds with lower yields tend to decrease because they become less attractive compared to new bonds offering higher yields. This is due to the inverse relationship between bond prices and yields. As interest rates increased from 0.10% to 5.50% between March 2022 and the present, the value of a 10-year bond bought at the lower rate has indeed decreased significantly.
2. Bank Investment in Bonds: You've highlighted that US commercial banks had excess cash during and after COVID lockdowns, which they invested in bonds. Some banks hedged against rising yields, but many did not. As interest rates continued to climb, banks holding bonds faced unrealized losses, impacting their financial positions.
3. The Bank Term Funding Program (BTFP): The Federal Reserve intervened by creating the BTFP program, which allowed stressed banks to borrow short-term against their bonds at par value, mitigating some of their losses. However, this comes at an additional cost, as the interest rate on the BTFP loans has also increased.
4. Future Fed Interest Rate Decisions: The Federal Reserve has been increasing interest rates, and you've mentioned a concern about what might happen if rates continue to rise. Banks may face additional challenges and costs in the event of further rate hikes, affecting their lending activities.
5. Private Sector Lending: You've noted that US loans to the private sector have been slowing down, despite the previous peak in January. This slowdown could be a result of various factors, including rising interest rates and the banks' financial stress.
6. Safety of the US Banking System: Your closing statement questions the safety of the US banking system in the face of these challenges.
