Treasury Duration

There have been many discussions on whether bonds, particularly U.S. Treasury notes and bonds, will continue to provide diversification and protection against equity declines. Even the traditional 60/40 stock/bond mix is being called into question now that yields have approached zero.

With the 10-yr treasury yield at 0.81% currently, there appears to be little return available for investors. However, keep a couple of key things in mind: (1) treasuries have little credit risk and offer a return OF principal as well as return ON principal (2) the durations of these notes and bonds have increased, providing additional return if rates do drop. Of course, there is much debate as to just how much farther yields can drop.

The chart highlights the sharp decline in yield on the 10-yr U.S. Treasury (red line). However, the duration of these notes has increased to 9.5 as the yield has dropped (blue line). Duration measures the sensitivity in bond price for a 1% change in yield. Other astute investors have compared the duration to the yield and caution that the risk (duration or price risk) is much higher than the yield.

So far, I only mentioned the 10-yr note. But, the duration of the 30-yr treasury bond is 24.1 compared with its yield of only 1.60%.