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.
