Chart of the week

As rates rise, duration moves to the forefront

Investment grade bonds’ yield and lengthening duration over time

April 27, 2018 | 1 minute minute read
  • The 10-year U.S. Treasury note has risen approximately 25 bps month to date and briefly crossed the psychologically important 3% mark on Wednesday.1
  • While Treasury yields remain low from a historical perspective, their steep climb in recent weeks shines a light on the risk that rising interest rates may have on traditional fixed income investments.
  • For example, the Bloomberg Barclays U.S. Aggregate Bond Index, the widely quoted benchmark for investment grade bonds, generated a year-to-date return of approximately -2.5%, underperforming many other major fixed income categories.2
  • As shown in the chart, the duration of traditional fixed income investments has steadily climbed over the past decade, from a low of just 3.7 years in January 2009 to approximately 6.1 as of March 31.3
  • Duration, expressed in years, measures the sensitivity of a bond’s price to changes in interest rates. The higher a bond’s duration, the more its price may decline as interest rates rise.
  • The low yield environment may limit the upside return potential in many fixed income sectors, while the downside risks for higher-duration investments could be substantial as interest rates rise.
  • Following many years in which interest rate sensitivity may have helped an investor’s portfolio, investors may be well served by reviewing their portfolio’s exposure to interest rate risk once again.

  • Federal Reserve Bank of St. Louis, 10-year U.S. Treasury note,

  • Performance data through April 26, 2018.

  • Bloomberg Barclays U.S. Aggregate Bond Index, as of March 31, 2018.

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