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