Silicon Valley Bank collapse: How a bad bond portfolio sale doomed the tech-focused lenderA bond portfolio sale proved fatal for the US tech and startup-focused lender, potentially triggering a chain of events that led to its collapse. Here is all you need to know.SVB said the loss on the portfolio was the reason why it attempted a $2.25 billion stock sale last week, using Goldman Sachs as an adviser.
But its plan to raise capital failed as panicked depositors rushed to exit the bank, and investors worried about a major hole in its balance sheet.The bond portfolio that SVB sold to Goldman Sachs on March 8 primarily consisted of US Treasuries and had a book value of $23.97 billion. It may be noted that SVB's bond bets on federal agency mortgage-backed securities, which carry low credit risk but high interest rate risk, were the long-term triggers that led to its demise.
This particular portfolio consisted mostly of longer-term mortgage securities, with up to 10 years maturity. However, with a sharp rise in interest rates, the bond market took a sharp plunge in 2022A rise in bond yields is not good news for bond holders. This is because bond yields and prices move inversely. When yields rise, the prices of bonds fall. As a result, SVB’s portfolio took a big hit and triggered a balance sheet crisis for the lender.
The bond portfolio transaction was carried out at “negotiated prices” and netted the bank $21.45 billion in proceeds, reported news agency Reuters. SVB still needed to raise capital to make up for the loss from the portfolio sale and had to resort to a share sale to plug the gap.