- The 10-year U.S. Treasury note has risen approximately 25 bps month to date and briefly crossed the psychologically important 3% mark on Wednesday.1
- While Treasury yields remain low from a historical perspective, their steep climb in recent weeks shines a light on the risk that rising interest rates may have on traditional fixed income investments.
- For example, the Bloomberg Barclays U.S. Aggregate Bond Index, the widely quoted benchmark for investment grade bonds, generated a year-to-date return of approximately -2.5%, underperforming many other major fixed income categories.2
- As shown in the chart, the duration of traditional fixed income investments has steadily climbed over the past decade, from a low of just 3.7 years in January 2009 to approximately 6.1 as of March 31.3
- Duration, expressed in years, measures the sensitivity of a bond’s price to changes in interest rates. The higher a bond’s duration, the more its price may decline as interest rates rise.
- The low yield environment may limit the upside return potential in many fixed income sectors, while the downside risks for higher-duration investments could be substantial as interest rates rise.
- Following many years in which interest rate sensitivity may have helped an investor’s portfolio, investors may be well served by reviewing their portfolio’s exposure to interest rate risk once again.
1 Federal Reserve Bank of St. Louis, 10-year U.S. Treasury note, https://bit.ly/29ecBfp.
2 Performance data through April 26, 2018.
3 Bloomberg Barclays U.S. Aggregate Bond Index, as of March 31, 2018.
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