Larry McDonald/The Bear Traps Report
- A 40% plunge in Apple's bonds highlights the risks facing banks' debt portfolios, according to Larry McDonald.
- The markets guru highlighted risks tied to mortgage-backed securities, which are on track for a third annual decline.
- Silicon Valley Bank's collapse in March, which set off a wave of banking turmoil, was caused by the losses on its bond portfolio.
Apple's long-term bonds have lost 40% of their value since late 2020 thanks to the Federal Reserve's interest-rate increases - and that's highlighting the mounting risks for banks from their debt holdings, according to Larry McDonald.
The price of Apple's 2.55% debt due in 2060 has slumped to about $61.80 from $100.59 at the end of 2020. The bulk of the declines came since early 2022, when the US central bank started raising rates to quell inflation. The Fed has lifted its benchmark rate by more than 500 basis points since then.
Bonds paying a fixed coupon rate become less attractive to investors as market interest rates move higher, causing the price of such securities to fall. Earlier this year, the shocking collapse of Silicon Valley Bank was triggered by massive losses arising from its portfolio of Treasuries, and the event set off a wave of turmoil across the global banking system.
"Interest rates up --- bonds prices down. $1 million invested in this Apple AAPL bond is now worth $600k, duration risk is on stage here. Now think of all those mortgage-backed securities on bank balance sheets," the "Bear Traps Report" founder said in a Wednesday post on X.
Mortgage-backed securities, or MBS, which are homebuyers' loans repacked as bonds, have also seen sharp declines in recent years. BlackRock's iShares MBS exchange-traded fund has shed more than 18% of its value since hitting a 2020 peak.
McDonald seemed to suggest that if the bonds of top-rated companies such as Apple could take such a knock from rising interest rates, declines in the broader debt market could be sizable.
MBS securities are closely related to mortgage rates. The US average 30-year mortgage rate surged to a 23-year high of almost 7.5% this month, indicating the scale of price displacement in the mortgage debt market.
According to the Atlanta Fed's Home Ownership Affordability Monitor, US home affordability has sunk to levels lower than before the 2008 mortgage crisis.