Zero coupon U.S. Treasuries have historically seen their returns driven by the following:

• Interest Rate Level Changes: This is measured by duration and has shown to account for 90% of historical investor returns.This is the inverse of the P/E ratio.
• Yield Curve Slope Changes: This is measured by key rate duration and accounts for 8 - 9% of returns. These are changes in which the yield curve becomes more or less steep.
• Yield Curve Curvature Changes: These changes are illustrated by the positive and negative butterfly shifts and account the small remainder of returns.

Bond Price Risk: Duration and Yield Volatility Influences

As interest rates change, a bond's price sensitivity is a function of:

• Maturity: Bonds with shorter maturities have less price volatility in the face of changing interest rates.
• Coupon: Low coupon bonds show more price volatility than high coupon bonds.
• Interest Rate Level: When interest rates are higher, bond price volatility tends to be lower. In other words, when rates tend to be exceptionally low, bond prices are more sensitive to an increase in interest rates.