German-Bond Investors Just Lost 25 Years of Yield in 14 Days

Exit bull, pursued by bear

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The Frankfurt Stock Exchange.

Photographer: Hannelore Foerster/Bloomberg

Duration: d(y)o͝orˈāSH(ə)n/ Noun -- The time in which an event takes place. Also, the sensitivity of a bond’s price to changes in its yield.

Over the past couple of weeks, investors in German government bonds have received a crash course in "duration," a geeky concept that is nevertheless a driving force in fixed income.

Buying longer-dated bonds with longer duration has been a popular strategy for investors seeking higher returns in an era of low interest rates. It can be risky, given that such debt is extremely sensitive to changes in interest rates and yields. When they go up, the price of bonds with a greater duration will fall a lot more than that of shorter-dated debt. 

The painful interplay of duration, bond prices, and yield has become startlingly apparent in recent days, as investors have rushed to sell longer-dated German government bonds.

Hans Mikkelsen, credit strategist at Bank of America Merrill Lynch, crunches the numbers on the outsize moves in bunds and comes up with some ugly math for investors:

.... 30-year bund yields have now increased 53bps over the past two weeks. For the typical high yield bond with a duration of 4.4, a 53bps increase in yield would imply roughly a 2.3% decline in bond price – or the equivalent of about a third of a year’s worth of yield. However, at their peak two weeks ago 30-year bunds had duration of 23.7. Hence 30-year bund prices have declined approximately 12% over the last two weeks, or roughly 25 years worth of yield!



The yield on the 30-year bund has already surged from an April low of 0.465 percent to 1.19 percent in the sell-off. Yields on 30-year U.S. Treasuries have risen to a near five-month high, prompting some high-profile investors to call the end of the historic bull market in bonds.

You've had plenty of warning about the susceptibility of the market to duration risk. Bloomberg News noted in March that if 30-year German bund yields were to rise by 50 basis points, investors would stand to lose about 10 percent.

That is more or less what just happened.

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