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Exploring a Silicon Valley Banking Style Portfolio

T.he dies Silicon Valley Bank had many causes. But at its core were institutional bond portfolios that plummeted in value as interest rates rose. So it’s no surprise that analysts and investors are scrambling to find similar treasures elsewhere. One of his perplexing discoveries is in Japan. Investment institutions hold large amounts of domestic and foreign long-term bonds.

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These bond holdings have already fallen in value thanks to a combination of sales and revaluations that occur when interest rates rise. This possibility is known as “duration risk”. Long-term foreign bond holdings by “other financial institutions,” a category that includes insurance companies, investment institutions and pension funds, reached $1.5 trillion in June, the latest available figure, down from year-end levels of about $2,930. billion dollars less. 2021 years.

Norinchukin Bank, a Japanese investment company, is one of the holders of such bonds. The company was a huge buyer of secured loan obligations, bundles of loans secured by a single product. The value of the company’s bond portfolio has been clipped by interest rates, which rose from 36 trillion yen ($293 billion) in March last year to 28 trillion yen in December. Japan Post Bank, a savings bank almost one-third owned by the Japanese government, is another institution at risk. Foreign securities have grown from virtually nothing in 2007 to 35% of the company’s total holdings.

Customers of these financial institutions svbof. In Silicon Valley, panicked venture capitalists have taken the lead. Japan Post Bank has a large number of individual depositors nationwide, boasting approximately 120 million accounts. The Norinchukin Bank’s clients, mostly agricultural cooperatives, also seem less likely to flee than excitable tech companies.

However, there are risks associated with exchange rate fluctuations. As noted by Brad Setser of the Council on Foreign Relations think tank, rising US interest rates have made it much more expensive to hedge against currency risk. This applies both to investors and to companies and governments that once purchased bonds. A Japanese investor sold $165 billion more long-term foreign government bonds than he bought last year. This is the largest sale on record. Rising interest rates have forced bond issuers around the world to pay more to borrow. Losing a previously trusted buyer only adds to the pain.

Also, a large holding of foreign financial assets is only one element of risk. Interest rates in Japan have been among the lowest by global standards since the early 1990s, after Japan’s infamous land and stock bubble burst. Three decades of relative economic stagnation and occasional deflation have meant that bond yields are very low, prompting financial institutions to buy longer-dated yen-denominated bonds for slightly higher returns. This would increase the amount of damage even if monetary policy were to tighten slightly.

However, it is increasingly unclear whether Japan can actually maintain its low interest rate policy. Consumer price inflation in January he rose to 4.3%. Wages at big companies look set to rise at the fastest pace in decades. A 1% rise in interest rates would reduce the value of bank yen-denominated bonds by more than ¥9 trillion. A large bank’s unrealized losses represent approximately 10% of its capital.people in Shinkin Banks, which are a type of credit union, are even higher, around 30%.

Last year, the Bank of Japan (boj) published analysis suggesting that these losses would be offset by changes in the value of the liability. Interest rates offered by banks to depositors tend to rise much more slowly than rates charged on new loans, relieving pressure. Our analysis suggests that these two forces almost completely cancel each other out for local banks. However, central bank calculations rely on assumptions about depositor loyalty. Rising interest rates are certain to reduce the value of bank portfolios. The persistence of depositors has not been tested recently.

of boj He claims there is no prospect of a rate hike yet. However, recent inflationary pressures and gains in other parts of the world have made this line harder to sustain. The mere possibility of an increase is already affecting holdings of foreign bonds as investors dispose of assets. And as Japanese institutional investors shift from buyers to sellers, the world’s corporate and bond issuers are losing once-trusted customers when they need it most.

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https://www.economist.com/finance-and-economics/2023/03/16/the-search-for-silicon-valley-bank-style-portfolios Exploring a Silicon Valley Banking Style Portfolio

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