Aug 17, 2018
The tradeoff between risk and return is a foundational investing concept. To generate return, investors must be willing to accept risk. Conversely, investors who wish to avoid risk altogether can’t expect to generate a meaningful return.
Today’s bond market offers investors an unusual set of tradeoffs in this regard. Yields on 2- and 10-year treasury bonds are very similar today, meaning investors can generate nearly as much return by owning a 2 year bond (2.6%) as a 10-year bond (2.85%), but with a fraction of the risk.
“Duration” is a unit of risk that measures how much a bond’s price goes up or down in response to interest rate movements. The 2-year treasury has a duration of 1.9, meaning it would fall in price approximately 1.9% in response to a 1% rise in interest rates. By comparison, the 10-year treasury would be expected to fall 8.6% in price if rates were to rise 1%. To us, this means investors have an incentive today to tilt bond portfolios toward shorter term maturities.
DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.