I agree with the sentiment that it's not the auditors, but actually the Fed only drives short term interest rates, while what is cause issues is duration on long term interest rates (particularly mortgages/MBS with 10+ year duration). Those rates are mostly set by the market and inflation expectations. So actually, quickly lowering inflation is key to keeping long term rates from going way up! In that sense what the Fed is currently doing is actually keeping the value of the bonds/MBS higher than otherwise (by driving the economy into recession).
Now where you could argue that the Fed made a mistake was in buying MBS (lowering net interest margin) during 2020 early in the pandemic. That drove mortgage rates down right when fiscal stimulus was increasing bank reserves and everyone who could refinanced.
Isn't the fed driving rates high to encourage unemployment to put pressure on inflation? Everything else is a byproduct of that move. I think the mortgage rate move was planned for an upcoming reset in housing prices.
There is a big difference between bonds and MBS that have already been issued and future ones. What the FED is doing now is tanking the value of securities with lower fixed interest issued in the past.
But that value depends on their duration and the current interest rate on bonds of similar duration. If bond/MBS buyers don't believe that the Fed will beat inflation back down to 2% then rates at 5-20year will rise very significantly! They have been doing this over the past year by setting the Fed Funds rate (and by QE buying bonds/MBS etc in extreme circumstances like 2020 and 2008 and then eventually unwinding with QT).
So, if they don't convince traders they will stop runaway inflation 5-20y rates could go to 10% or higher (inflation rate + net interest margin), which would absolutely crush long duration bond values! If you think a 10% fall in value is big, it could easily be 50% down and that would be a big deal for all banks.
If you hold to maturity, you know exactly how much you make for the duration. This is one reason banks put them in their hold to maturity portfolio. They are a known quantity with basically no intrinsic risk (at least for bonds).
If you don't hold to maturity, you have to think about spot/resale prices. These fluctuate based on market demand, and what new securities are being offered at. If the fed is selling 5% bonds, nobody will want your smelly old 1% bonds.
If you are holding cash, you are probably stoked to buy some 5% bonds.
When you say:
>In that sense what the Fed is currently doing is actually keeping the value of the bonds/MBS higher than otherwise
Im matters which bonds you are talking about. Bonds issued last year, Bonds issued today, or 5 years in the future.
The Fed is cranking up bond rates today. This devalues bonds issued last year. I agree that it ALSO decreases the rate of bonds 5 years in the future (by driving inflation down as you say.
They're all just time limited cash flows (ok not zero coupons), but that cash flow and duration matters as does what people will pay for it (if you need the cash). The challenge comes when your depositors either want their money back or want higher rates today (on money you've already invested/loaned). These guys were going to burn billions in negative cash flow even if they "got their money back", but might have survived for the year or so it takes for 10+ year yields to fall back down a point or so and make them liquid again with survivable losses... assuming inflation fell, but who knows what actually ends up happening. The MOVE has be been crazy.
Now where you could argue that the Fed made a mistake was in buying MBS (lowering net interest margin) during 2020 early in the pandemic. That drove mortgage rates down right when fiscal stimulus was increasing bank reserves and everyone who could refinanced.