How a Morning Walk with My Dogs Turned Into a Masterclass on Bonds
I've been curious about how bonds work and their influences. I had some specific questions, and I wasn't getting the answers I needed from articles — I needed to talk to an expert! So one morning, while walking my dogs, I discussed bonds with ChatGPT. It was enlightening — like having a bond expert walk alongside me in the park.
Here is a summary of our discussion — from the basic technicalities of bonds to how these seemingly low-risk investments contributed to one of the biggest bank failures in recent memory: Silicon Valley Bank (SVB).
So, what is a bond? At its core, a bond is a loan: you lend money to a government or corporation, and in return, they promise to pay you interest (called a "coupon") over a fixed period and return the original amount (the "principal" or "par value") at maturity.
If you buy a newly issued bond when market interest rates are stable, you typically pay the par value — for example, you would pay €1,000 for a €1,000 bond that pays 4% annually (if 4% is the prevailing interest rate at the time). But once that bond is out in the market, its price can fluctuate. When interest rates rise, newer bonds offer better returns, making older ones less attractive — so their market value drops. So, if you want or need to sell it, you may not get par value (€1,000). The longer the bond's term, the more sensitive it is to interest rate changes. That's called duration risk. If you can hold the bond until maturity, you will get your full principal back, but sometimes (especially if you are leveraged), you could face a liquidity crunch and have to sell early. In that case, you will only receive whatever price the market is willing to pay for the bond at that time.
This is what tripped up SVB. SVB collapsed in March 2023 — not because of reckless lending, but because it misjudged interest rate risk. The bank had parked billions in long-term bonds — mostly U.S. Treasuries and mortgage-backed securities — when rates were low. As rates spiked, the market value of those bonds dropped.
In March, SVB sold about $21 billion worth of those bonds at a $1.8 billion loss. That implies they sold at roughly 91–92% of par value — an 8–9% drop, just from interest rate moves. That announcement spooked the market. Within 48 hours, panic spread, depositors rushed to withdraw their funds, and SVB was gone. A textbook old-fashioned bank run — the more panic, the more people withdrew, which created more panic. On and on it goes until collapse.
It wasn’t just about the loss — it was about what that loss signaled: that SVB might be in trouble, with a mismatch between long-term assets and short-term liabilities. Trust evaporated instantly.
Does this imply an investment opportunity in distressed bonds? Potentially, yes. When bonds trade below par due to market conditions — not because the issuer is likely to default — they can represent a compelling value opportunity. If you can buy a bond at 90 cents on the euro and hold it to maturity, you’ll receive the full par value, while also locking in a higher effective yield. The key is to avoid leverage and ensure the issuer is fundamentally sound. The most significant risk in this strategy is default risk — the chance that the issuer won’t repay you. For government bonds from stable economies, that risk is typically very low. However, in corporate or emerging market bonds, it can be significant. So, you need to do your homework.
As we walked and talked, my questions on bonds were answered, and it became clear: the financial system still hinges on three fundamental things — liquidity, leverage, and trust. Lose one, and you’re wobbling. Lose all three, and you fall.
It shows that some of the best thinking doesn’t have to happen at your desk — it can occur on a dog walk! It's pretty amazing to have an expert on every topic in your pocket (ChatGPT) that you can have a conversation with when it suits you.
What topic should I discuss next?
#Finance #SVB #Bonds #RiskManagement #Banking #Trust #Investment #Dogs
(This article was written with the help of ChatGPT).