Let's say you're a bank. You have $1B in deposits. You use it to buy bonds that will be worth $1.1B in 2030. All good so far.
Then the government starts selling those bonds a lot cheaper. To buy the same bonds you have today would only cost $900k.
Even though the 2030 value of those bonds is the same, the 2023 value just plummeted. (And they will gain more per day to eventually make up the difference.)
When your customers demand their money, you have to give them 2023 dollars.
A bond that you can redeem early has the safety of cash here. A bond that you can't redeem early does not.
There could be a bailout though. A massive fire in Silicon Valley caused by the Fed tweaking interest rates doesn’t look like a good thing, so we’ll likely see a fire brigade coming along and pouring some money in.
I really hope it's not the fed though, or any federal authorities. They shouldn't invent a new higher level of FDIC protection. They should allow losses here even if they want to do that. Just covering all of the losses which of course they could do, that's a bad precedent.
Then the government starts selling those bonds a lot cheaper. To buy the same bonds you have today would only cost $900k.
Even though the 2030 value of those bonds is the same, the 2023 value just plummeted. (And they will gain more per day to eventually make up the difference.)
When your customers demand their money, you have to give them 2023 dollars.
A bond that you can redeem early has the safety of cash here. A bond that you can't redeem early does not.