Investors want low convexity bonds right now because they are least sensitive to a change in yields. Right now bond prices are falling/yields are rising so folks want bonds that are less responsive to these changes.
Also, while it may look like capital losses are lower with a 30-year bond, take a look at the scale on the left-hand/vertical axis and you will see that it starts at -$5,000, as opposed to -$500 for the 10 year maturity bond, and $50 for the 1 year bond. What this means is that the capital loss on the 30-year bond if interest rates go up just 1.0% is 16.31%.
Download the spreadsheet and play with the assumptions in cells B12 and B13 to see the changes.
Hi Eric,
Investors want low convexity bonds right now because they are least sensitive to a change in yields. Right now bond prices are falling/yields are rising so folks want bonds that are less responsive to these changes.
Also, while it may look like capital losses are lower with a 30-year bond, take a look at the scale on the left-hand/vertical axis and you will see that it starts at -$5,000, as opposed to -$500 for the 10 year maturity bond, and $50 for the 1 year bond. What this means is that the capital loss on the 30-year bond if interest rates go up just 1.0% is 16.31%.
Download the spreadsheet and play with the assumptions in cells B12 and B13 to see the changes.
With smiles!
Jason