Duration

Duration measures a bond’s price sensitivity to interest rates: a duration of 8 means the price moves roughly 8% for every 100 basis point change in yield (in the opposite direction). Technically it is the weighted average time to receive a bond’s cash flows, but on a desk it is used almost exclusively as a risk multiplier.

Traders live in duration terms because yield moves alone say nothing about P&L. A 10bp move is trivial in a 3-month bill and painful in a 30-year bond, purely because of duration. Portfolio managers express macro views by going “long duration” (betting yields fall) or “short duration” (betting they rise), and hedge auction supply by selling matching duration ahead of the sale.

• Rules of thumb: 2-year note ≈ 1.9, 10-year note ≈ 8, 30-year bond ≈ 16–17.
• Lower coupons and longer maturities both raise duration; convexity makes the true relationship slightly curved for big moves.

Worked example: You hold $50 million of 10-year notes with duration 8.1. A weak auction tails 3bp and 10-year yields rise 6bp on the day. Estimated P&L: −6bp × 8.1 × $50m = −$243,000. The identical 6bp move on $50 million of 2-year notes (duration 1.9) would cost only about $57,000.