Aug 29, 2010
We have watched with amusement all the discussion of bond ETF investing as it relates to ‘bubbles.’ Remember that the bond market as defined by the Aggregate Bond Index has a duration in the 4-5 year range. This is where the real investable bond market is – not 30 year treasuries.
Indeed, by our ETF database (which covers >96% of overall ETF/ETN assets), we see that less than 10% of total treasury bond ETF assets are in bond funds with durations greater than 10 years. Our overall weighted average estimate of the duration of ETF investors aggregate duration in the Treasury bond grouping is 4.9 years.
Now, it IS true that the risk of drawdown for 10- 30 year bonds becomes more significant after a parabolic spike up like the one we have been in – but this should be obvious as this is just the nature of volatility. Long duration bonds are very volatile securities – and when a highly volatile security goes parabolic, drawdown risk will increase. We find it irrelevant and distracting to listen to this talk of bond bubbles and more practical to think in terms of actual drawdowns within the bond market sub-segments.
Here is an ETF Volatility Chart of relative volatilites across some different kinds of ETFs. We included IEI (~4-5 year duration U.S. Treasury ETF) because it represents the weighted average duration of all Treasury bond ETF investor assets:
 Duration measures how fast you are to be paid your money back. It adjusts for the stated coupon so that if your bond pays a high coupon, the duration is lower as you are being repaid more quickly and therefore the variability of possible cash flows is reduced.
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