From the archiveCase study · Mar 20235 min read
SVB: the bank run that crashed 2-year yields
A $1.8bn bond loss sparked a $42bn run in a single day, sank the 16th-largest US bank and sent 2-year Treasury yields down about 100bp in three trading days — the most since 1987.
A $1.8bn bond loss sparked a $42bn run in a single day, and regulators closed Silicon Valley Bank on 10 March 2023, the biggest US bank failure since 2008.
Markets bet the Fed would have to slow down: the 2-year Treasury fell about 100 in three trading days, its biggest three-day fall since October 1987.
Every depositor at SVB and Signature was made whole and the Fed launched the BTFP, yet it still hiked by 25bp on 22 March. First Republic failed anyway on 1 May and was sold to JPMorgan Chase.
The trader’s angle
How rising rates, hidden bond losses and uninsured deposits can turn into a lightning bank run — and reprice the Fed’s path within days.
2-year Treasury yield
4.0%
down-100bp in 3 daysFrom about 5.05% on 8 Mar to about 4% on 13 Mar — the biggest three-day fall since October 1987, and bigger than the slide after 9/11.
Withdrawals in one day
$42bn
downThu 9 MarAbout a quarter of SVB's deposits. Another $100bn was queued to leave the next morning, the Fed's Michael Barr told Congress.
Uninsured deposits
94%
end-2022The share of SVB's deposits above the $250,000 insurance limit, per the Fed — concentrated among venture-backed tech companies.
Hidden losses on HTM bonds
$15bn
downvs ~$16bn of equityUnrealised losses on held-to-maturity securities at end-2022 — almost all of SVB's capital, yet invisible in its reported equity.
A bank takes in deposits and invests them in loans and bonds. When interest rates rise, bonds bought at low yields fall in price — and the longer their , the bigger the fall.
If a bank labels those bonds , the losses don’t reduce its reported capital: they stay hidden unless the bonds have to be sold. That only works while depositors stay put. covers $250,000 per depositor, per bank, so anyone holding more has every reason to run at the first sign of trouble.
What happened
On Wednesday 8 March 2023 Silicon Valley Bank, the 16th-largest US bank, said it had sold $21bn of securities at a $1.8bn after-tax loss. It also said it would raise $2.25bn of new capital.
It backfired. On Thursday the shares fell 60%, venture capitalists urged their start-ups to pull their cash, and depositors tried to withdraw $42bn in a single day. On Friday 10 March California regulators closed SVB — the biggest US bank failure since 2008.
On Sunday, after New York regulators also closed Signature Bank, the Treasury, Fed and FDIC invoked a ‘systemic risk exception’ to make every depositor at both banks whole, insured or not. The Fed, as , launched the Bank Term Funding Program (BTFP): loans of up to a year against Treasuries and other high-quality bonds, valued at par rather than market price. Banks could borrow against bonds that had lost value without selling them at a loss.
Why it happened
SVB was a bank built for zero interest rates. In the tech boom it tripled in size, from $71bn of assets at end-2019 to $211bn at end-2021, as start-ups parked their cash there. Much of it went into bonds, largely labelled held-to-maturity, at the low yields of the time.
Then the Fed hiked eight times in under a year, taking its from near zero to 4.5–4.75%. Bond prices fall when rates rise, so by end-2022 bonds SVB carried at $91bn were worth about $76bn. That was a $15bn hidden loss against roughly $16bn of equity, invisible in reported capital because the bonds weren’t .
The funding was fragile too. About 94% of deposits were uninsured, held by a tight network of venture-backed firms that took advice from the same investors. Selling bonds made the loss real and told them exactly what to fear. A classic followed — only far faster.
How it ripples through markets
How a bond loss became a bank run — and a rates shock
- 1
A deposit boom is parked in bonds
2019–21: SVB triples in size as start-ups pile in cash, and invests much of it in securities at low yields.
- 2
Fed hikes create hidden losses
downBond pricesBonds bought at low yields fall in price as rates rise: eight hikes in under a year leave $15bn of unrealised losses on held-to-maturity bonds — nearly all of SVB’s equity.
- 3
A forced sale makes the loss real
downSVB shares8 Mar: SVB sells $21bn of bonds at a $1.8bn loss and tries to raise $2.25bn of capital.
- 4
Uninsured depositors run
About 94% of deposits are uninsured, so depositors could lose money if SVB fails and rush to get out first. 9 Mar: $42bn of withdrawals in a day, with $100bn more queued. Regulators close SVB on 10 Mar.
- 5
Contagion hits look-alike banks
downRegional bank stocksInvestors dump banks with similar depositors, even after SVB's and Signature's depositors are made whole.
- 6
Markets price a gentler Fed
down2y Treasury yieldStressed banks lend less, tightening credit by themselves, so hike bets collapse; money floods into safe-haven Treasuries and the 2-year yield falls about 100bp in three days.
Why it mattered for traders
For the rates market, SVB was a regime change. That week Powell had pushed the 2-year yield above 5%. Traders in priced about 70% odds of a 50bp hike.
A bank run flipped the logic: stressed banks lend less, tightening credit by themselves, so markets bet the Fed would have to slow down. Add a rush into Treasuries and the 2-year yield fell about 100bp in three trading days. By Monday futures priced a one-in-three chance of no hike at all.
The front end moved most because that is where the Fed’s path is priced. The 10-year fell far less, so the inverted , with short yields above long ones, steepened sharply.
Equity traders learned that spreads by resemblance. First Republic, another bank with wealthy, largely uninsured depositors, fell 62% on 13 March, and the KBW Nasdaq Bank Index lost 25% in March.
What happened next
Banks leaned hard on the Fed, borrowing a record $152.85bn from the in the week to 15 March, plus $11.9bn from the BTFP. Eleven of the largest US banks deposited $30bn at First Republic. Yet the Fed still hiked by 25bp on 22 March, to 4.75–5%: lending tools for financial stability, the policy rate for inflation.
First Republic failed anyway on 1 May and was sold to JPMorgan Chase — with $229bn of assets, a bigger failure than SVB. The Fed’s own review blamed SVB’s managers for failing to handle basic interest-rate and liquidity risk, and its own supervisors for not acting fast enough. BTFP borrowing peaked at around $168bn before the programme stopped new loans on 11 March 2024.
Academy lessons for this story
- R8Curve trades, carry and roll-downSet up a trade on the gap between short and long yields, size it so only the gap matters, and work out what a bond earns while you wait.
- R5Supply, auctions and relative valueTell whether a government bond auction went well, explain why the newest bonds yield a little less, and say how heavy borrowing moves the curve.
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Sources
- Federal Reserve Board — Joint Statement by the Department of the Treasury, Federal Reserve, and FDIC
- Federal Reserve Board — Federal Reserve Board announces it will make available additional funding to eligible depository institutions (Bank Term Funding Program)
- Federal Reserve Board — Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank
- SVB Financial Group via SEC EDGAR — SVB Financial Group Form 8-K: strategic actions announced 8 March 2023
- CNBC — 2-year Treasury yield posts biggest 3-day decline since aftermath of 1987 stock crash
An original summary written from the sources above. Figures are rounded; follow the links for the full record.
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