My
last post highlighted how interest rates rising, result in bond values falling
and vice versa. I also mentioned how
duration provides an easy way to calculate this - how your bond portfolio’s
value will rise and fall given a 1% move in interest rates.
Recently
I wrote about how low Treasury yields are currently, and that
I don’t think yields will rise for awhile.
This view was reinforced in comments
made by Janet Yellen, the Vice Chairwoman
of the Federal Reserve, when she said rates could stay low through 2014.
Still, I could be wrong and rates could rise, which would
result in the value of bonds falling.
The next question is if interest rates do rise, by how will
they go up? I took a look at the 5 year
Treasury note since 1953 comparing year-over-year changes on monthly data,
using only periods where interest rates were rising. I picked 5 years because the current modified
duration on a 5 year Treasury Bond at with a coupon rate of 1.00% is about
4.85, which I think is a good risk/reward tradeoff between a steep yield curve
and low absolute rates.
Here is what the data show:
- Mean: 0.89
- Standard Deviation: 0.81
- Max: 5.26
In the next post of this series I will breakdown this data
and explain what it means.
