Forum Topics Be aware of risks in financials

Risks in the financials

We all know that bonds have taken a real bath, on some measures the worst sell-off in the shortest timeframe ever! An interesting aspect of this has been that many corporates and mortgage holders have avoided the full brunt of the yield increases by locking in long-dated low-cost debt. A very wise decision by those involved.

My concern goes to the other side of that trade. That is, who is holding this exposure? In fact, I'm amazed outside of SVB that there haven’t been more explosions. The size of the MTM on the holders of instruments could possibly see the greatest losses we have ever seen (outside of GFC?). The fallout depends on the nature of the holder of this risk.

If it is all held by long-term investing funds, such as the Future Fund or Australian Super, then it will only result in poor results for the investors. No systemic issues. If it is held in specialised vehicles or, heaven forbid, leveraged vehicles, the results could be spectacularly bad.

The risks, I suspect, lay largely overseas. The Aussie banks should be relatively immune unless they have ventured, stupidly, into being a counterparty, given mortgages here are predominately variable not fixed rates. Any exotic financials I am avoiding. Foreign financials with exotic business models I am avoiding, in fact, all foreign financials I am avoiding.

Of course, there is the risk of contagion and that is more difficult to assess, but could significantly impact leveraged vehicles, especially in finance, even if not directly involved. A fear of systemic risk may also shake the whole markets. what to do?

I am looking through my portfolio (still largely fully invested), continuing to steer to a conservative stance, (bias to no debt, steady earnings businesses companies), certainly not a time to wander too far out the risk curve. Imo could be wrong


a month ago

@Solvetheriddle fascinating post. I was listening yesterday to the GS Exchanges podcast yesterday on Commercial Real Estate Risks. I've linked this to your post even though bonds only provide a minor portion (I'm guessing <25%) of financing in the US commercial real estate sector ... no idea about Australia.

This podcast is a fascinating examination of the outlook for the US Commercial Real Estate market which it describes as a "slow motion train wreck". There are some really interesting stats. on the fundamental impacts of the rise of hybrid working, and the intertia (through lease terms) of this still to be worked through post-pandemic.

It also links to your theme in that the smaller banks are heavily exposed to commercial real estate, which tends to be highly leveraged. They are predicting a potentially significant wave of small bank failures on a scale similar to the historical Savings and Loans event, and are predicting a potential bill of $1trilllion to be ultimately picked up by the US tax-payer.


@mikebrisy thanks Mike, yes the difference from historical clean outs 1982/1991 is the willingness of the Fed to step in quickly and smother liquidity to prevent the full cycle playing out, the clearing event. maybe debt is too high now that to allow that is, well........hmmm armageddon?. wouldnt surprise me if the fed has been proactive, ready to bail out any one who gets into trouble quickly, so making my concerns redundant. could be a bit of a scare for a while though. keeps leading me to the same conclusion, hold strong companies that shouldnt be impaired under most probable scenarios.