Factors Driving Treasury Investment Returns and Bond Price Risk
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.
- CFA Level 2: Fixed Income Part 1 – Introduction
- Principles of Credit Analysis
- High Yield Corporate Debt (aka Junk bonds)
- Analyzing Credit of Asset Backed Securities
- Analyzing Credit of Municipal Bonds
- Sovereign Debt
- Three Shapes of the Yield Curve
- Parallel and Non-parallel Shifts in Yield Curve
- Factors Driving Treasury Investment Returns and Bond Price Risk
- Yield Curve Construction with Treasuries
- LIBOR Swap Rate Curve
- Theories of the Term Structure of Interest Rates
- Key Rate Duration
- How to Calculate Interest Rate Volatility?
- Benchmark Yield Spreads
- Valuing an Option Embedded Bond using Binomial Interest Rate Tree
- How to Price Convertible Bonds?
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