What's One Year of Duration Worth?

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bck63
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What's One Year of Duration Worth?

Post by bck63 » Tue Feb 11, 2020 4:05 pm

Is there a way to figure out how much more yield one should get from a bond fund with an additional year of duration? This is assuming all other things are equal (credit quality, types of bonds, etc).

Uniballer
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Re: What's One Year of Duration Worth?

Post by Uniballer » Tue Feb 11, 2020 4:14 pm

Larry Swedroe's bond book suggests you should be getting 20 basis points per year over short term bonds (1-2 years). Otherwise it isn't worth the additional risk.
Last edited by Uniballer on Tue Feb 11, 2020 4:39 pm, edited 1 time in total.

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gmaynardkrebs
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Re: What's One Year of Duration Worth?

Post by gmaynardkrebs » Tue Feb 11, 2020 4:27 pm

bck63 wrote:
Tue Feb 11, 2020 4:05 pm
Is there a way to figure out how much more yield one should get from a bond fund with an additional year of duration? This is assuming all other things are equal (credit quality, types of bonds, etc).
I think it would follow the yield curve pretty closely.

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bck63
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Re: What's One Year of Duration Worth?

Post by bck63 » Tue Feb 11, 2020 5:43 pm

Uniballer wrote:
Tue Feb 11, 2020 4:14 pm
Larry Swedroe's bond book suggests you should be getting 20 basis points per year over short term bonds (1-2 years). Otherwise it isn't worth the additional risk.
Excellent. Thanks so much for taking the time to answer.

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midareff
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Re: What's One Year of Duration Worth?

Post by midareff » Tue Feb 11, 2020 7:38 pm

Uniballer wrote:
Tue Feb 11, 2020 4:14 pm
Larry Swedroe's bond book suggests you should be getting 20 basis points per year over short term bonds (1-2 years). Otherwise it isn't worth the additional risk.
Ditto... that's the same as I recall from the book and his threads here.

alex_686
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Re: What's One Year of Duration Worth?

Post by alex_686 » Tue Feb 11, 2020 8:04 pm

Uniballer wrote:
Tue Feb 11, 2020 4:14 pm
Larry Swedroe's bond book suggests you should be getting 20 basis points per year over short term bonds (1-2 years). Otherwise it isn't worth the additional risk.
I will mildly disagree. The book is over 10 years old. That advice was based on that market structure. The market structure has changed. It is much lower, flatter, and more stable.

I work in fixed income and have a host of really cool toys to play with, but I honestly don’t have much advice for you. The 10 year treasury is at 1.5%. The market is just plain weird.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

dkturner
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Re: What's One Year of Duration Worth?

Post by dkturner » Wed Feb 12, 2020 11:37 am

alex_686 wrote:
Tue Feb 11, 2020 8:04 pm
Uniballer wrote:
Tue Feb 11, 2020 4:14 pm
Larry Swedroe's bond book suggests you should be getting 20 basis points per year over short term bonds (1-2 years). Otherwise it isn't worth the additional risk.
I will mildly disagree. The book is over 10 years old. That advice was based on that market structure. The market structure has changed. It is much lower, flatter, and more stable.

I work in fixed income and have a host of really cool toys to play with, but I honestly don’t have much advice for you. The 10 year treasury is at 1.5%. The market is just plain weird.
Your point is well taken, but the concept of tying duration to higher returns is still a good idea, IMHO. In hindsight, Larry would have been better off if he had used percentage differences, rather than basis points, in delineating his theory of extending duration. I might take a stab at converting his basis point rule of thumb to percentage differences - if I can find my wayback machine.

Edit: Back in early 2007, just prior to The Big One, 5 year Treasury Notes had a yield of about 4.75%. The current yield for 5 year Notes is about 1.5%. The rough equivalent for Larry’s 20 basis point difference “rule” would now be about a 6 basis point difference. Requiring at least a 6 basis point increase in interest rate before increasing portfolio duration (or average maturity) by one year is an indicator I can work with in the current environment. Right now the spread between the 5 year and 10 year yield is only 19 basis points - not worth extending maturities.

alex_686
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Re: What's One Year of Duration Worth?

Post by alex_686 » Wed Feb 12, 2020 1:00 pm

dkturner wrote:
Wed Feb 12, 2020 11:37 am
alex_686 wrote:
Tue Feb 11, 2020 8:04 pm
Uniballer wrote:
Tue Feb 11, 2020 4:14 pm
Larry Swedroe's bond book suggests you should be getting 20 basis points per year over short term bonds (1-2 years). Otherwise it isn't worth the additional risk.
I will mildly disagree. The book is over 10 years old. That advice was based on that market structure. The market structure has changed. It is much lower, flatter, and more stable.

I work in fixed income and have a host of really cool toys to play with, but I honestly don’t have much advice for you. The 10 year treasury is at 1.5%. The market is just plain weird.
Your point is well taken, but the concept of tying duration to higher returns is still a good idea, IMHO. In hindsight, Larry would have been better off if he had used percentage differences, rather than basis points, in delineating his theory of extending duration. I might take a stab at converting his basis point rule of thumb to percentage differences - if I can find my wayback machine.

Edit: Back in early 2007, just prior to The Big One, 5 year Treasury Notes had a yield of about 4.75%. The current yield for 5 year Notes is about 1.5%. The rough equivalent for Larry’s 20 basis point difference “rule” would now be about a 6 basis point difference. Requiring at least a 6 basis point increase in interest rate before increasing portfolio duration (or average maturity) by one year is an indicator I can work with in the current environment. Right now the spread between the 5 year and 10 year yield is only 19 basis points - not worth extending maturities.
I don’t this is right. Duration is already expressed as the difference in prices as expressed in percentage. A bias point is .01%. You are now kind of taking the change of a change. I don’t think there is going to be a easy rule og thumb here.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

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