Inside the Yield Book: The Classic That Created the Science of Bond Analysis, 3rd Edition

Chapter 3

Historical Convergence to Yield

Introduction

The main message of duration targeting and return pathways is that duration-targeted (DT) bond returns converge toward the initial yield as the investment horizon lengthens. In Chapter 2, a random walk simulation of yield changes confirmed that this convergence holds regardless of whether yields follow a trending or random path.

The basic process behind this return convergence is that accruals act in the opposite direction to price movements. Consequently, accumulated accruals gradually offset price gains or losses to the point that multiyear returns tend to cluster around the initial yield.

We recognize that although the simulation process can generate a wide variety of yield paths over ...