8/6/2019 March 31 2011 Commentary Color

1/2

Market CommentaryMarch 31, 2011

Interest rates . What Goes Down Must Go Up

The last time we observed a sustained rise in interest rates was prior to 1981. Since that t ime, rates have been on

a steady decline, which has generated an almost 30-year bull market for bonds. The 10 Year Treasury Constant

Bond yield dropped from 15.86% on 9/30/81 to 2.08% on 12/18/08. By the end of 2010 it had risen to 3.30%.

From 1980 to 2010, the Lehman Brothers Aggregate Bond Index only experienced two down years (i.e., when the

price of the bond fell more than the interest paid on the bond); in 1994 and 1999 the index was down

and , respectively. The S&P 500 had a rougher road, experiencing six years of negative returns, the worst

being in 2008. Even in 1997, when the S&P 500 experienced its second highest annual return of 33.36%, it

barely outpaced the bond indexs best year.

Generally, to determine the price of a bond, you need to know its coupon rate, maturity date, credit quality and

current interest rate. All things being equal, except the direction of interest rates, when interest rates fall bond

prices increase (as they have over the last 30 years) and when rates rise, bond prices decrease (only two of the last

30 years).

Typically, the longer the maturity the more sensitive the price of the bond will be to interest rate movements. Theterm for this is duration, and it is measured in years. As illustrated below, if a bond has a 5-year duration, a one

percent increase or decrease in interest rates would cause the price of that bond to decrease or increase by 5%,

respectively. The longer a bonds duration, the more sensitive it is to interest rate movements.

The 2010 returns for the 10- and 30-Year Treasuries were 8.01% and 8.72%, respectively (see below). By the end

of 2010, the yields on these bonds were 3.30% and 4.34%, having fallen from 3.85% and 4.63% on 12/31/2009.

The risk that is masked by these returns is the fact that as of 9/30/10 the rates were 2.53% and 3.69%,

respectively - lower than at the end of 2010. So rates actually rose in the 4th quarter. Had you bought these bonds

on 9/30/10 their actual returns for the quarter (non-annualized) would have been and ,

respectively. What the yield didnt tell you was that the bonds durations were 8.54 and 16.60.

8/6/2019 March 31 2011 Commentary Color

2/2