Money & Finance › Bonds, rates & Treasuries › Why bond prices fall when yields rise
Duration: how sensitive a bond is to rates
· Concept
Fact, law or dataA rule, statute, definition or measured number.
Duration is a single number, in years, that tells roughly how much a bond's price moves when interest rates change.
See it on the Money & Finance map →How it works
Rule of thumb: price change is about duration times the change in yield, in the opposite direction. A bond with a duration of 6 loses about 6% if yields rise 1 point, and gains about 6% if they fall 1 point. Longer maturities and lower coupons mean higher duration; a zero-coupon bond's duration equals its maturity. A 2-year note is near 2, a 30-year Treasury about 17. For big moves a second measure, convexity, refines the estimate.
Why it matters
It is the main gauge of interest-rate risk. It explains why long bonds and bond funds lost heavily in 2022, and why SVB's long bonds sank it in 2023.
Think of it like
Like a long fixed-rent lease: when market rents jump, a building locked in for 30 years loses more value than one re-leasing next year.
Facts, rules and data
Defined by economist Frederick Macaulay in 1938, with John Hicks deriving a similar measure in 1939. Bond fund fact sheets list it, and 2022 losses lined up closely with it.
Debates and risks
Duration assumes small, even shifts across all maturities; real rate moves are often uneven, and for mortgage bonds the measure itself shifts as rates move.
Connections (2)
▸Duration: how sensitive a bond is to rates measures the size of Why bond prices fall when yields riseFact, law or data
The connection
The price-yield rule says bond prices fall when yields rise; duration says by how much. A bond is worth its payments discounted to today, and a rate rise shrinks distant payments most. Duration is the value-weighted average wait for those payments, so it roughly equals the percentage price change per 1-point yield move.
When and why
Frederick Macaulay defined duration in 1938; John Hicks reached a similar measure in 1939. Bond traders worldwide use it daily.
How we know
It follows from the math of discounting fixed payments. In 2022 long Treasuries lost about 30% as yields rose about 2 points, close to the prediction.
Debates and risks
For bonds with options, such as callable or mortgage bonds, 'effective' duration comes from models of borrower behavior, so different firms can report different numbers for the same bond.
▸Duration: how sensitive a bond is to rates sets the rate risk of Bond funds and bond ETFsFact, law or data
The connection
A bond fund's average duration tells how much its share price drops per 1-point rise in rates. Because funds keep buying new bonds, their duration stays roughly fixed and losses are not recovered on a set date; instead higher yields on new bonds gradually rebuild returns, roughly over a period equal to the duration.
When and why
Fund fact sheets list 'average effective duration'. Short-term funds sit near 2 years, broad aggregate funds near 6, long Treasury funds near 16.
How we know
2022 returns lined up with duration: short-term Treasury funds lost about 4%, aggregate funds about 13% and long Treasury funds about 30%.
Debates and risks
The 'break even after one duration' rule assumes one rate change and steady yields after; real paths vary, so recovery times differ.