Consider the following graph of unrealized losses on securities held by reporting banks (from Rupkey/Financial Markets This Week):

Source: Rupkey, “Financial Markets This Week,” March 20, 2023.

This made me wonder what would make these unrealized losses go to zero? Obviously a reduction in interest rates. I don’t have the data to do the calculation on hand, but I have marketable federal debt at par value and at market value. I can look at the ratio of those two and how that ratio moves with a given interest rate.

Figure 1: Ratio of par value of marketable debt to market value (blue, left scale), and ten year Treasury yield, % (tan, right scale). NBER defined peak-to-trough recession dates shaded gray. Source: Dallas Fed, Treasury, NBER, and author’s calculations.

There’s an obvious correlation. From the regression:

            ratio = 0.8817 + 0.0455(gs10)

adj-R2 =

Keep reading this article on Econbrowser Blog - James Hamilton & Menzie Chinn.

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