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Treasuries Now Have The Worst Risk/Return Profile In Decades

Published 10/21/2012, 03:05 AM
Updated 07/09/2023, 06:31 AM
BP
1.06%
TTEF
0.39%

Below is an excellent chart from Goldman Asset Management. It shows the risk/return profile of holding the 10-year Treasury during different periods of time. "Principal" is the mark-to-market impact of the bond yield increasing by 100bp (1%). "Roll" is the impact of time passage. In one year the 10-year bond becomes the 9-year bond, and if the yield curve is positively sloping, the 9-year bond should have a lower yield, offsetting slightly the 100bp yield increase. "Coupon" is just the income collected in one year, and "Total Return" is a combination of the three.

In addition to the ridiculously low current coupon these days, the duration of the 10-year bond is now considerably higher (precisely because of the low coupon), making the bond more vulnerable to rate shocks. That's why the 100 bp rate increase (dark blue) causes a much higher principal loss now than it did at any time in the past 40 years.

GS: In the 1980s, the average yield and duration of the 10-year Treasury was 10.6% and 6.1 years, respectively. When rates rose 100 bps, investors still made money. On Friday, the on-the-run 10-year Treasury had a yield of 1.6% and a duration of 9.2 years, resulting in heightened rate sensitivity and significantly less coupon to offset principal losses during periods of higher rates.
10y treasury risk

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