That has to be an inflation adjusted yield, right? Why would anyone do anything remotely risky for such terrible returns? You can almost find government bonds with similar average yields.

Nope! I got a 2.0% mortgage in 2021 (no points or anything) and the bank then turned around and sold it to Freddie who paid them 1.7% (so the bank made a nice 0.3% just for originating the loan).

Then Freddie packed my loan and sold it to others for something likely to be below 1.7%...

Weren't the rates on government bonds negative if you were a large investor like a bank?

>You can almost find government bonds with similar average yields.

Not a few years ago. T-Bills were paying like 0.1% in 2021[1]

[1] https://home.treasury.gov/resource-center/data-chart-center/...

And 10-year bonds were well below 1%.

https://fred.stlouisfed.org/series/DGS10

They're very safe assets, they just have a long duration which makes them really risky if you could need them to cover deposits.

To make things more straightforward, let's just compress it to a 1-year time frame vs a 30-day bond. So a $100 MBS at 1.5% would pay you $101.50 if you held it for 1 year. If you have $100 in deposits and a $100 MBS bond, you're "solvent". But what happens if after 30 days, your depositor asks for his $100 back? You either need to sell your MBS or find other money to pay them.

If you try to sell the MBS to pay that $100 deposit liability and interest rates are about the same as they were when you bought it, you'd likely get around $100 and things are okay. If however, rates have spiked since then (like they have here), investors can either buy your bond that pays 1.5% or they can buy a new issuance 1-year bond paying 4% or 5%, or perhaps a 30-day bond paying 1.5%. So you need to give them a discount in order to sell your bond -- in this case it might be upwards of 30% or 40%.

So if you sell your MBS, you'll only get $60 or $70 for it -- leaving you a huge shortfall that you need to makeup from your other reserves. If you could convince your depositor to leave his money in the bank until that bond matures, you'd be completely fine -- but the timing mismatch and interest rate spike just kills the bank.

I get how it'd put them in bankruptcy or whatever the precise term is for a bank. I'm just curious what it means in terms of people getting their money back. If their assets lost 10% of their value, I could see that being enough, combined with the bank run, to put them under. But if everything else gets sold off at 90 cents to the dollar, that's not awesome but it's not like "poof it's gone entirely" either.

> But if everything else gets sold off at 90 cents to the dollar, that's not awesome but it's not like "poof it's gone entirely" either

You answered your own question. People will very likely get most, or even all, of their money back, just after the gov is able to offload some of the assets. Problem is, if you're a startup, you can't just wait a few months for the cash to make payroll.

A bond with a 10-year yield of 1.56% has a price of $0.85 on the dollar. A bond with a 10-year yield of 4% has a price of $0.676 on the dollar. So if yields increase from 1.56% to 4%, the bond price falls by 21%.

The risky part is the 10+ year duration, more than the ~1% yield over treasuries.

You can't use your intuition about stock prices for bonds/fixed income. In FI, its all a numbers game. As rates go up, prices go down.