Photo by Michael Guesev, St. Mark’s Basilica, Venice 2024
The Collapse of Silicon Valley Bank
In March 2023, Silicon Valley Bank collapsed seemingly overnight, catching markets completely off guard and marking the most significant U.S. bank failure since the 2008 global financial crisis. The 16th-largest bank in the U.S. at the time, the collapse quickly sparked panic as many wondered who was next and how such a collapse was possible in the post-2008 banking regulatory environment. What made this collapse more confounding was the bank’s minimal apparent credit risk and its significant holdings of predominantly high-quality U.S. Treasury bonds and agency mortgage-backed securities (MBS). Ultimately, despite the seeming safety of the investments, SVB failed due to a rapid rise in interest rates as the U.S. Federal Reserve aggressively shifted its policy to fight rising inflation in the aftermath of the pandemic. This rapid rise in rates caused the bank’s fixed-income bond investments to plunge in value, news of which quickly spread, triggering massive, urgent depositor withdrawals. Ironically, unlike the credit-driven bank failures of 2008, it was interest rate risk, and not credit risk, that proved fatal for the bank. The SVB saga provides a real-world primer on advanced fixed income principles. In the post that follows, we dissect SVB’s bond portfolio strategy as a case study to show how concepts like bond pricing, duration, convexity, DV01, and yield curve dynamics contributed to the bank’s downfall, and teach what each of these is along the way. We will also draw broader lessons from fixed-income and risk-management insights for banks and portfolio managers alike.
SVB’s Bond Portfolio Strategy: Long Duration and Low Yields
SVB’s meteoric growth during 2019–2021 left it awash in deposits from technology and biotech clients that raised money through venture capital funding and IPO proceeds. Meanwhile, loan demand was limited as SVB’s startup and corporate clients were flush with cash from stimulus and fundraising and had less need to borrow. Due to low loan demand, SVB decided to invest a large share of its deposits in “safe” long-term bonds, primarily U.S. Treasury securities and agency MBS. These investments carried very low coupons (interest rates) given the ultra-low-rate environment of 2020–21, which meant longer duration profiles (greater interest rate sensitivity) than higher-coupon or shorter-term bonds. By the end of 2022, SVB had amassed over $120 billion in bond investments, including about $91 billion classified as held-to-maturity (HTM) securities (mostly 10+ year agency MBS). The weighted-average duration for the HTM portfolio was 6.2 years, reflecting substantial exposure to long-term, fixed-rate assets. SVB’s strategic bet was that these high-quality bonds would provide steady yield pickup over deposits without incurring credit risk. However, this concentration in long-duration bonds left the bank extremely vulnerable to interest rate changes. SVB had undertaken a classic maturity transformation risk: using short-term funding (depositor money that could be withdrawn at any moment) to invest in long-term fixed-income assets. This duration mismatch with assets far longer in duration than liabilities set the stage for a significant interest rate risk in SVB’s balance sheet.
Bond Yield: A bond’s yield represents the rate of return an investor earns from holding the bond, reflecting both the income from coupon payments and any capital gain or loss relative to its current market price. The most comprehensive measure, yield to maturity (YTM), is the internal rate of return that equates the present value of all future cash flows (coupons and principal) to the bond’s current market price. When a bonds price trades below par, its yield exceeds the coupon rate because investors earn both periodic interest and a gain at redemption; when its price trades above par, the yield is lower because part of the return offsets the price premium. Yield therefore links market price, interest rates, and investor return expectations, serving as the fundamental benchmark for comparing fixed-income securities across maturities and credit risks. Bond Par: is a bond’s face value, the amount the issuer promises to repay the investor at maturity, typically set at $1,000 per bond in U.S. markets
Bond Pricing Basics: Inverse Relationship Between Price and Yield
SVB’s collapse illustrated a fundamental feature of fixed income: bond prices move inversely to current market yields. As interest rates began climbing sharply in 2022, the market value of SVB’s long-term Treasury and MBS holdings fell quickly. When yields rise, existing bonds with lower coupons become less valuable, so their prices drop to offer a competitive total yield to investors. SVB learned this the hard way when the Federal Reserve raised rates at the fastest pace in decades, causing the bank’s fixed-income portfolio market value to erode. Even though the bonds were safe from credit risk (default), their market prices plummeted as new bonds with much higher yields were issued. In SVB’s case, as interest rates rose, the value of its fixed-income securities fell, a standard principle of bond math. Many of SVB’s Treasury and MBS holdings carried coupons around 1–2%; when market yields jumped to 4–5%, the prices of those bonds had to fall (often 15–20% below face value) to yield equivalently. Only this price/yield see-saw was not just a theoretical concept but instead a live balance-sheet crisis for SVB. The bank’s unrealized losses mounted throughout 2022 as its bond portfolio’s fair value sank, a direct consequence of the inverse price-yield relationship that governs bond valuation. The rising interest rate environment turned SVB’s once “safe” bond portfolio into a ticking time bomb of depreciating assets.
Duration, Convexity and DV01: Measuring Interest Rate Risk
The severity of SVB’s losses can be understood through the fixed-income properties of duration, convexity, and DV01, the key measures of interest rate risk. Duration is the primary indicator of a bond’s sensitivity to interest rate changes, roughly estimating the percentage price change for a 1% (100 basis point) move in yield. SVB’s HTM portfolio had a duration of about 6.2 years, implying that a 1% rise in rates would cause roughly a 6% decline in those bond values (all else equal). In practice, between early 2022 and early 2023, U.S. 10-year Treasury yields rose by over 200 basis points, which, given a ~6-year duration, would predict a price drop on the order of 12% or more for long bonds. Indeed, SVB’s $120+ billion bond book saw unrealized losses balloon into the tens of billions of dollars. One can translate this risk into DV01 (Dollar Value of 1 basis point): a 6-year duration on a $100 billion portfolio implies about a $60 million loss for every 0.01% (1 bp) uptick in yield. Such small daily rate moves were shaving millions off SVB’s asset values daily in 2022.
Bond Duration: Duration measures a bonds sensitivity to changes in interest rates, expressed as the weighted average time it takes to receive all cash flows (coupon payments and principal). In essence, it estimates how much a bond’s price will move for a given change in yields—typically, a 1% rise in rates leads to roughly a duration-percent fall in price. Higher-coupon or shorter-maturity bonds have lower durations since investors recover cash sooner, while zero-coupon or long-maturity bonds have higher durations because all value lies far in the future. Duration is thus a core tool for managing interest-rate risk, allowing investors and portfolio managers to align asset and liability profiles and quantify exposure across yield-curve shifts.
However, duration is only a linear approximation of the price change. For greater precision, we need to consider bond convexity, the second-order effect that describes how the rate sensitivity changes with larger moves. Most bonds exhibit positive convexity: as yields rise, the price drop is slightly less severe than duration alone would predict (and when yields fall, price gains are slightly larger). SVB’s portfolio, though, was also heavily invested in mortgage-backed securities, which carry negative convexity. With MBS, when rates rise, homeowners hold onto their mortgages longer (refinancing slows), effectively extending the bond’s duration at the worst time. MBS prices decline more when interest rates rise and less when rates fall, due to negative convexity. In other words, SVB’s MBS would lose more value in a rising-rate scenario than a comparable non-callable bond (bonds that cannot be repaid early), because the expected cash flows extend and the bond behaves more like a traditional long-duration fixed income instrument when rates jump. This negative convexity amplified SVB’s losses as yields climbed. Together, the long duration and unfavorable convexity made SVB acutely sensitive to interest rate shocks. Its risk metrics (had they been properly monitored) would have revealed huge exposure: even a modest rate increase could inflict outsized damage on its capital. SVB essentially neglected key fixed-income measures, duration, convexity, and DV01, leaving the bank one interest-rate hike away from significant portfolio losses.
Held-to-Maturity vs. Available-for-Sale: Accounting and Liquidity Risks
Compounding SVB’s interest rate exposure was the way it accounted for its bond portfolio. The majority of SVB’s securities were classified as Held-to-Maturity (HTM), rather than Available-for-Sale (AFS). Under accounting rules, HTM assets are carried at their amortized cost on the balance sheet, immune to day-to-day market price fluctuations. This means unrealized losses (losses only become realized when the asset is sold or marked to market) on HTM bonds do not directly reduce a bank’s reported equity, a convenient way to avoid earnings volatility. SVB’s management leaned heavily on this: by year-end 2022, about 78% of its securities were designated as HTM, far above peer banks’ HTM usage. The catch, however, is that to qualify as HTM, the bank must intend (and be able) to hold those bonds until maturity. If it sells any HTM security (barring minor exceptions), accounting rules would require reclassifying the entire HTM portfolio to AFS and immediately marking everything to market. In SVB’s case, that would mean recognizing the full extent of the unrealized losses that had accumulated as interest rates rose. This put SVB in an accounting trap: the firm was reluctant to sell HTM assets to meet liquidity needs because doing so would crystallize losses across its whole bond book. As a result, SVB’s enormous interest-rate losses remained largely hidden in financial statement footnotes (unrealized and undisclosed in earnings), masking the rapid deterioration of its capital health.
On the smaller AFS portfolio that SVB did carry (about $26 billion at the end of 2022), market losses flowed through to equity (via other comprehensive income). However, SVB’s capital still appeared adequate on paper. The illusion of stability persisted until liquidity pressures forced the issue. As information spread through back channels that SVB was under significant stress, a large deposit outflow followed. Meanwhile, the bank had limited liquid assets to sell to meet the deposit outflows, as it had parked so much of its investments in HTM. In early March 2023, SVB sold $21 billion of its available-for-sale securities to raise cash, realizing an after-tax loss of $1.8 billion. This sale wiped out a significant portion of the bank’s tangible equity and further signaled to the market that huge losses were lurking on the balance sheet. Because SVB had to fire-sell what it could (AFS bonds) while its HTM losses remained unrecognized but enormous, confidence evaporated rapidly. The held-to-maturity accounting maneuver had backfired, delaying loss recognition but also tying management’s hands, leaving the bank illiquid when it most needed flexibility. Once the losses were finally revealed, SVB’s credibility and liquidity unraveled almost instantly.
The Yield Curve and Rate Volatility: SVB’s Perfect Storm
SVB’s downfall unfolded amid unprecedented interest rate volatility and an inverted yield curve. After years of near-zero interest rates, the Federal Reserve began aggressively tightening monetary policy in 2022 to combat inflation. In the span of roughly 12 months, the Fed hiked short-term rates by over 400 basis points, one of the fastest rises on record. Long-term rates rose in tandem, but not as uniformly: by late 2022, the yield curve had inverted (short-term Treasury yields exceeded long-term yields) for the first time since 2019. Banks traditionally thrive on a steep yield curve (borrowing short-term, such as through deposits at low rates, and lending or investing long-term at higher rates), but SVB’s strategy assumed a low-rate, upward-sloping yield curve. That assumption broke down entirely in 2022. As the curve flattened and inverted, SVB’s net interest margin advantage evaporated – the bank’s deposit funding, which had been very low-cost, grew more expensive (or began to leave for better rates). At the same time, the yields on its long-term bonds remained fixed at the prior low levels. The carry trade SVB had been running was essentially a thin spread play, holding long-duration bonds funded by cheap deposits that turned against them. In industry history, banks often count on depositor inertia (“sleepy” depositors who accept low rates), but SVB’s predominantly business depositors were neither small nor sleepy. These were large, uninsured corporate deposits, and by 2023, many account holders were acutely rate-sensitive and quick to seek higher yields or withdraw funds at any sign of trouble.
Yield Curve: The yield curve is a graphical representation of the relationship between bond yields and their maturities at a single point in time, typically using government securities of identical credit quality. Under normal conditions, it slopes upward, reflecting higher yields on longer maturities to compensate for inflation risk, time risk, and opportunity cost.
The yield curve dynamics thus played a pivotal role: not only did rising long-term yields crush SVB’s bond prices, but spiking short-term rates and an inverted yield curve also incentivized its clients to move deposits to money market funds or other banks offering higher interest rates. In essence, SVB faced rate shocks on both sides of the balance sheet: asset values falling and liabilities (deposits) becoming more expensive and flighty. The volatility in rates was extraordinary, as market interest rates swung dramatically in 2022–23, catching many institutions off guard. SVB, in particular, had made the fatal mistake of failing to hedge its interest-rate risk, leaving it especially vulnerable to the Fed’s rapid rate increases. When those rate hikes hit, the bank was stuck with a long-duration portfolio in an environment where both the level and shape of the yield curve moved against it. This perfect storm of rate volatility and yield curve inversion provided the macro trigger that exposed SVB’s balance sheet flaws. It highlighted how critical it is for fixed-income investors to consider not just parallel shifts in interest rates, but also twists in the yield curve and sudden jumps in short-term rates, scenarios that can severely stress an unprepared portfolio.
Fixed Income Lessons: Curve Dynamics, Duration Positioning, and Market Risk
The collapse of SVB encapsulates a wide range of lessons for fixed-income investors. First, it underscores the importance of yield curve dynamics in portfolio strategy. A well-structured bond portfolio must account for various yield curve scenarios: parallel shifts, steepening, flattening, or inversion. SVB bet on a stable or gently upward-sloping curve; when the curve inverted and short-term rates spiked, that bet failed spectacularly. The principle for investors is to stress-test portfolios across different curve shapes, what if short-term rates leap above long-term rates? Banks and asset managers often use scenario analysis to evaluate such risks, examining how both assets and liabilities behave under changing curve conditions.
Second, SVB’s experience highlights the importance of duration positioning in fixed-income portfolios. Taking on a long duration (long interest rate exposure) can boost yield when rates are low or falling, but it is exceedingly risky when rates are trending higher. An advanced fixed-income investor will actively manage duration exposure based on the rate outlook and risk tolerance, for example, shortening duration to reduce sensitivity in a rising-rate regime or lengthening duration in anticipation of falling rates. SVB’s management effectively positioned the bank extremely long on duration at the worst possible time. In contrast, prudent portfolio management might use derivatives or asset reallocations to dial down duration when facing an aggressive rate-tightening cycle. SVB’s duration gap: the difference between asset duration and liability duration, was allowed to grow unchecked. A core tenet of asset-liability management is to keep this gap within reasonable bounds or hedge it, precisely to avoid the kind of hit that SVB suffered when interest rates jumped. In fixed-income terms, SVB was running a massive, unhedged long-bond position funded by hot money, a textbook case of poor duration risk alignment.
Finally, SVB’s fall teaches a broader lesson about market risk management. Market risk (in this context, interest rate risk) can be just as lethal as credit risk. Advanced risk metrics such as DV01, duration gap, and convexity should be central to risk oversight for any bond portfolio or bank balance sheet. It is not enough to hold “high quality” bonds; one must quantify and limit the extent to which those bonds can lose value when market conditions change. SVB’s risk management function failed to adhere to basic principles: the bank had no chief risk officer for much of 2022. It also did not implement any hedging strategies (such as interest rate swaps or futures) to offset its long-duration exposure. Proper use of hedging instruments is a staple of advanced fixed income management, for example, paying fixed/receiving floating via interest rate swaps to neutralize duration, or buying options to protect against extreme moves. SVB chose to leave its interest rate position naked, a decision that proved catastrophic. The bank’s collapse underscores the importance of measuring, monitoring, and managing interest rate risk with the complete toolkit of modern fixed-income analytics. Duration and convexity measures, scenario stress tests, and hedging strategies are not academic exercises but fundamental safeguards against the kind of market risk that can destroy even a solvent institution virtually overnight.
Risk Management Implications for Banks and Portfolio Managers
SVB’s failure has sobering implications for risk management in banking and fixed-income portfolio management. For banks, the episode underscores the need for robust asset-liability management (ALM) and liquidity planning. A few key takeaways: diversify funding sources and avoid heavy reliance on large uninsured deposits. SVB’s depositor base was highly concentrated and withdrew funds en masse at the first sign of trouble. Banks should monitor their liability duration and stickiness – retail deposits and long-term borrowings are generally more stable than tech startup deposits, which can vanish quickly. Maintaining ample liquidity buffers is equally critical. This means holding a sufficient stock of high-quality liquid assets (such as short-term Treasuries or cash) that can be sold without material loss to meet sudden outflows. SVB’s liquidity coverage was clearly inadequate; it lacked a contingency funding plan for a severe run scenario. Conducting regular liquidity stress tests simulating what a rapid $50 billion withdrawal day would look like is now standard best practice (and, in fact, part of post-2008 regulations). SVB’s management failed to perform rigorous stress testing that might have flagged the lethal combination of rising rates and fast outflows.
From a portfolio perspective (for asset managers and fixed-income investors), SVB’s collapse is a case study in balancing yield and risk. Chasing yield by extending duration or reaching for illiquidity (as SVB did by locking up funds in long-term HTM securities) can create hidden vulnerabilities. Portfolio managers should employ risk metrics such as VaR (Value-at-Risk) or scenario analyses to quantify potential losses from rate moves, and set limits on the acceptable level of risk. They should also be mindful of negative convexity assets (e.g. MBS) and size those positions prudently or hedge their convexity risk. Another implication is the importance of mark-to-market discipline. While accounting rules allow for held-to-maturity treatment, risk managers should internally recognize economic reality and treat unrealized losses as very real when assessing capital and risk. In investment funds, this discipline is inherent (as portfolios are marked to market and investors can redeem), but in a bank like SVB, management’s ability to ignore market value changes was a dangerous self-deception.
In practice, a sound risk management framework for both banks and bond portfolios will integrate interest rate risk limits, hedging programs, liquidity contingency plans, and regular stress testing. SVB had significant lapses across all these fronts: it lacked hedges, underestimated liquidity needs, and seemingly failed to prepare for rapid rate hikes and deposit flight. The result was that an otherwise fundamentally solvent institution (one with assets that would have paid out in full if held to maturity) became insolvent in a matter of days, a stark reminder that market risk can kill when mismanaged. The collapse of SVB will be studied in risk management courses as a cautionary tale of how not to position a bond portfolio, reinforcing the timeless principles of diversification, prudent duration positioning, active hedging, and preparing for the unexpected in financial markets.
Sources
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- Evans, Michael. “What Happened to Silicon Valley Bank?” Investopedia, updated March 31, 2025.
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- Kothari, Vinod, and Timothy Lopes. “SVB Collapse: Focus on Risk of MBS Investing.” Vinod Kothari Consultants Blog, March 21, 2023.
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