The Reflexive Bid

The macro herd is obsessed with “SVB 2.0” and duration mismatch risk. Banks sitting on unrealized losses. Long-dated securities underwater. The narrative writes itself.

What they’re missing: the same mismatch creating the risk is now creating a mechanical, involuntary bid for US Treasuries.

This isn’t a bullish call. It’s an explanation for why the hollow rally might persist longer than fundamentals suggest. And why, when it eventually breaks, the snap-back could be more violent than anticipated.

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The Problem Everyone Sees

Duration mismatch is real. When the Fed raised rates from 0% to 5.5% in record time, banks with long-duration asset portfolios got hit. Unrealized losses on securities peaked around $690B in Q3 2022. They’re still sitting around $337B today.

Figure 1: Bank unrealized losses peaked at $690B in Q3 2022, now at $337B