Duration is how far a bond's price moves when interest rates move. A duration of 8 means the price shifts about 8% for every 100 basis point change in yield, in the opposite direction. The textbook definition is the weighted average time to receive a bond's cash flows, though on a desk it just gets used as a risk multiplier.
A yield move on its own tells you nothing about P&L. That is why traders think in duration. A 10bp move is trivial in a 3-month bill and painful in a 30-year bond, and duration is the whole reason for the gap. It is also how a portfolio manager puts on a macro view. Long duration is a bet that yields fall, short duration a bet that they rise. Managers hedge auction supply the same way, selling matching duration before the sale.
A 2-year note carries a duration of about 1.9. A 10-year note is nearer 8, and a 30-year bond runs somewhere around 16 to 17. Longer maturities raise the number, and so do lower coupons. The relationship is not a perfectly straight line, though. Convexity bends it a little once the move gets big.
Say you hold $50 million of 10-year notes with a duration of 8.1. A weak auction tails 3bp and 10-year yields close the day 6bp higher. That 6bp against a duration of 8.1 on $50m is a loss of about $243,000. The same 6bp on $50 million of 2-year notes, duration 1.9, costs roughly $57,000.
