Leave it to the banksters to find a way around any regulations or avoid being subject to the free market, the principle they breach. The interest rate is a problem to all those who, thanks to uncle Sam cheap money, have been borrowing left and right and inflating the heck out of all asset classes.
But just when you thought that the FEDs about about to hit the breaks, not put and end, to this sham, here comes the banks with another trick up their sleeves, the hold to maturity trick. The gist of the idea is that if you have a bond and you hold it to maturity, you do not have to claim any loss on it value, in the mean time, due to rising interest rates.
Although that might be true, for example iif you have a stock and it goes down before it goes up, you do not sustain any loss unless you sell it. However, if you buy on margin and you have a margin call, they you have to sell and you have to take the loss. If banks are required to maintain a certain amount of liquidity, at the least the reserve, they this amount cannot be “hold-to-maturity”, because it is by definition cash equivalent.
So a bank can buy a 2% bond and keep to maturity get paid par + coupon and they are on top. However, if inflation start to run faster than 2% and they have to hold to maturity, then they will lose money on the deal.
The questions becomes at what point the “risk” factor in the system will force interest rates to be higher than inflation, the real inflation not the CPI fake news. What is going to happen then? Are banks going to find themselves better off taking the loss and cashing out? What will that do to the bond market as well?
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