Duration: A Simple Way to Gauge Bond Risk

Oct 26, 2018

In early October, longer-term Treasury-bond yields crossed the proverbial “line in the sand” in the eyes of some bond observers. In just three days, the 10-year yield soared from 3.05% to 3.23%, reaching its highest level since 2011. The 30-year jump was similarly dramatic, from 3.20% to 3.40%, a new five-year high.

The immediate cause of this bond yield surge was stronger-than-expected economic growth, coupled with Fed Chairman Jerome Powell’s comments that interest rates are “a long way from neutral” — with the clear implication being that more rate increases should be expected.

But the real backdrop goes beyond these recent events. For most of the past decade, the Fed and other global central banks have purposely pushed interest rates down to historic lows and held them there. Only recently have these rates been allowed to begin their rise back toward “normal” market rates. While this normalization of interest rate policy is a good thing overall, the swift and brutal reaction of stock market investors showed why significant concerns exist regarding the impact of this normalization on the future prices of financial assets.

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Written by

Austin Pryor

Austin Pryor

Austin Pryor has 40 years of experience advising investors and is the founder of the Sound Mind Investing newsletter and website. He's the author of The Sound Mind Investing Handbook which enjoys the endorsements of respected Christian teachers with more than 100,000 copies sold. Austin lives in Louisville, Kentucky, with his wife Susie. They have three grown sons and many grandchildren.

Mark Biller

Mark Biller

Mark Biller is Sound Mind Investing's Executive Editor. His writings on a broad range of financial topics have been featured in a variety of national print and electronic media, and he has appeared as a financial commentator for various national and local radio programs. Mark also serves as Senior Portfolio Manager to SMI Advisory Service’s Private Client managed-account program and the SMI Funds.