I was reading this article in the Motley Fool about Silicon Valley Bank’s closure and in this paragraph was a bunch of terms that I couldn’t wrap my head around. But the thing that got me was: “bond values go down when interest rates go up.”
Can someone explain *why* bond values go down when interest goes up? And what crash course on economics I should take to get a handle on all this?
Excerpt from article:
>”This is where Silicon Valley Bank went wrong. It bought too many higher-yielding held-to-maturity (HTM) assets that were meant to be — as their classification suggests — held until they mature; this maturity could be as much 30 years into the future. The over-commitment to the wrong long-term assets subsequently prevented the bank from buying enough shorter-term, available-for-sale (AFS) bonds and debt instruments that (if necessary) could have been sold to fund customer withdrawals. Less than one-fourth of SVB’s securities backing customer deposits were of the available-for-sale variety, in fact. Aggravating the misstep was the purchase of fixed-income instruments that proved overly sensitive to rate hikes. Remember, bond values go down when interest rates go up.
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>It was this unhealthy mix of assets that would eventually deal the death blow.”
In: 8
When interest rates go up, there’s less demand for bonds. That lack of demand drives down values. Banks also need to have money available to meet withdrawals when they’re made, which you can’t do with bonds that must be held until maturity.
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