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Duration risk in action

May 17, 2024

Investors in bonds face two primary risks: duration risk and credit risk. Duration risk measures a bond’s sensitivity to interest rate changes, with higher durations indicating greater sensitivity. For a 30-year U.S. Treasury bond, credit risk is minimal due to the relatively strong creditworthiness of the U.S. government. On June 26, 2020, the 30-year U.S. Treasury yield was 1.27% with a duration around 21 years. Today, the yield has risen to 4.52%, causing the bond’s price to fall by approximately 45%—the largest four-year loss in 100 years. At ECP, we still avoid long durations as we believe the current market does not adequately compensate for this risk.

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Duration risk in action

May 17, 2024