Thanks that makes sense. What I was hoping to see was links to what specifically they did that was not smart. Eg did they really just buy a lot of bonds, not spacing it out?
Bonds are normally priced at the current interest rate, then modified based on type e.g. higher yield for longterm bonds, and less yield for short term bonds.
Recently we've been in an inverted yield curve where short term yield was superior to longterm yield.
The way I see it they did a few things wrong:
1 - bought too much of the same instrument (diversity)
2 - did not bond ladder (put themselves into a high risk situation)
3 - Moved unrealized risks into realized losses by fireselling bonds (bad timing which provoked liquidity crisis)
If you think about it, #1 & #2 were easily manageable. It is the colossal screwup of #3 on top of #1 & #2 that proved to be the coup de grace.
Whether the interest rates were going to increase or decrease was completely up in the air. No one knows after a few rate increases.
This is equivalent to selling at a loss a stock because it has a 3 - 6 month downtrend when the stock is still fundamentally sound, nothing has changed in the thesis instead of riding it out longer with the recognition you may not receive primo returns or even decent returns, but you won't be taking a big hit either.
