Why U.S. Treasuries Aren't 'Risk-Free' Anymore

Consuelo, they're not only abundant, but I think they're very different.

If you look at what happened to Silicon Valley Bank, it didn't have a problem in its loan portfolio.

It didn't have a problem on its trading desk.

It had a problem in its treasury portfolio.

Treasuries are supposed to be the risk-free asset.

In fact, under the Bank for International Settlement standards, the BIS standards, treasuries have a zero risk weighting.

So there's a big incentive for banks to own treasuries.

The thing is, is that banks have been stuffed with treasuries over the last several years because the government has issued a mountain of them in the wake of the pandemic.

And the Fed has bought those treasuries and the Fed has some $5 or $6 trillion in treasuries on its balance sheet and is trying to unwind the size of its balance sheet.

So what is it doing? It is selling those treasuries to the banking system.

And so you're seeing a higher than normal share of treasuries in bank portfolios, upwards of 20% in some cases.

And when you have big price movements that happen because of the sharp rise in Federal Reserve interest rates, it moves those treasuries around with the market.

And now we live in a world where everything is out in the open.

someone can pick up their iPhone and not only get the information about what might be happening to Silicon Valley banks' portfolios, but if they have the slightest whim of concern, they can hit a button on their phone and transfer assets out.

And that's what happened to Silicon Valley Bank.

It had a lot of treasuries.

There were more long treasuries than short treasuries.

And long treasuries are the ones that get hurt by a rise in interest rates.

They went down in value.

I was just kind of blown away by the fact that in the Fed's risk scenarios, according to Jamie Dimon's letter, that the Fed had not figured in a scenario of higher interest rates.

This is a problem.

It's not just a problem, Consuelo, that they are incented to hold treasuries, but it's also the fact that the government has issued an avalanche of treasuries in the last three years through the combination of COVID, stimulus packages.

So the banking system is getting filled up with treasuries instead of making community loans to help mom and pop in Peoria.

And the government has stepped in to make sure that the treasuries, which represent collateral for the banks, don't lose their value.

So the government is basically guaranteed that these treasuries, which might be worth 60 cents on the dollar, are actually worth par, 100 cents on the dollar.