Does the yield spread effect the volatility?

Discussion of the Bond portion of the Permanent Portfolio

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thisisallen
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Does the yield spread effect the volatility?

Post by thisisallen » Wed Oct 12, 2016 3:10 pm

these days the yield spread for 10 vs 30 is very narrow. The 20 yr and the 30 yr are equal (yesterday at least). Does this effect the volatility so that the usefulness of the LTT is less?
Is the question clear?
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buddtholomew
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Re: Does the yield spread effect the volatility?

Post by buddtholomew » Wed Oct 12, 2016 4:04 pm

Duration is the best approximation for volatility in bonds.

TLT has approximately 18 year duration. For every 1% rise in interest rates, TLT can be expected to lose 18% in NAV.
IEF 7-10 year has 7.65 duration for a loss of about 8% on a 1% rise in interest rates.
thisisallen
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Re: Does the yield spread effect the volatility?

Post by thisisallen » Wed Oct 12, 2016 4:14 pm

yield spread has nothing to do with volatility then. So even if the spread between a 10 yr bond and a 30 yr bond is narrow it does not effect the volatility of the 30 yr bond?
In other words, if interest rates fall then 30 yr bonds still rise in price much more than 10 yr bonds even if the spread is narrow?
Is that clear?
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