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Same Shock, Different Damage
Why one rate hike hits two bonds completely differently
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Two bonds, one rate move, very different pain
Picture two bonds sitting side by side in a portfolio.
Bond A is a 2-year US Treasury. Bond B is a 30-year US Treasury. Both issued by the same government. Both quoted at par. Both look 'safe' in the brochure.
Tuesday morning, the Fed hikes. Market yields on similar Treasuries jump by 1 percentage point across the board. Same shock, same issuer, same day.
You check prices in the afternoon. Bond A is down about 2 percent. Annoying, but small. Bond B is down about 18 percent. That's a stock-market-crash kind of move on something marketed as safe.
Same rate move. Same credit risk. Twentyfold difference in damage. The reason has a name. It's called duration, and it's the single most useful number in fixed income.