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.
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.
https://www.ustreasuryyieldcurve.com/
Go look and see how long rates at 10y have changed with expectations over the last year as short 6mo have consistently risen.