Duration & DV01
The single most important risk measure in fixed income-and the number that destroyed a $200 billion bank.
The Bank That Didn't Understand Duration
In March 2023, Silicon Valley Bank collapsed in 48 hours. The cause? They didn't understand duration. Their "safe" Treasury portfolio had $21 billion in unrealized losses.
SVB had purchased long-dated Treasuries and mortgage-backed securities when rates were near zero. When the Fed hiked rates 500 basis points in 18 months, these "risk-free" assets became toxic. The bonds were safe in terms of credit risk-but their duration risk was catastrophic.
Duration measures how much a bond's price changes when interest rates move. SVB's portfolio had an average duration around 6 years. That means a 1% rise in rates caused roughly a 6% loss. With $91 billion in securities, a 400bp rate rise translated to over $20 billion in losses.
Duration is the number that kills portfolios. Every rates trader, risk manager, and portfolio manager must understand it.
Learn From History
Duration disasters repeat. Select an event to see what went wrong and what we can learn:
Silicon Valley Bank Collapse
$21B+ unrealized lossesThe Setup
SVB held $91 billion in "held-to-maturity" securities, mostly long-dated Treasuries and MBS purchased when rates were near zero. Average duration: 6+ years. When rates rose 400+ bps in 2022, these "safe" assets lost over $21 billion in market value.
What Happened
Depositors withdrew $42 billion in a single day after SVB announced it needed to raise capital. The bank collapsed in 48 hours. Largest U.S. bank failure since 2008.
Why Traders Care About Duration
Duration isn't just for risk managers. It's how traders size positions, construct hedges, and understand their P&L.
Position Sizing
"I want $50,000 of risk per basis point." DV01 tells you exactly how much notional to trade. If a 10Y bond has $0.08 DV01 per $100 face, you need $62.5 million notional for $50K DV01.
Hedging
You're long $100M of 10Y bonds with $80,000 DV01. To hedge, short enough 2Y bonds to offset. If the 2Y has $0.02 DV01 per $100, you need $400M notional of 2Y to neutralize the position.
Relative Value
Duration-neutral curve trades let you bet on the shape of the yield curve without betting on rate direction. A steepener (long 10Y, short 2Y) can be structured to have zero net DV01.
Risk Limits
Most trading desks have DV01 limits, not notional limits. A $1 billion position in 2Y notes might have the same DV01 as $200 million in 10Y bonds.
Duration Hedging Strategies
The key insight: you can offset duration risk by taking an opposite position in a different instrument. Here are the common approaches:
Cash Hedge
Hedge a bond position with another cash bond
Futures Hedge
Hedge with Treasury futures (2Y, 5Y, 10Y, or Ultra-Bond)
Swap Hedge
Use interest rate swaps to offset duration
Build a Duration-Hedged Position
Trade Legs
Combined Position
Payoff Profile
P&L across parallel yield curve shifts (all tenors move equally):
Risk Summary
Position is approximately duration-neutral. P&L driven by curve shape changes, not parallel moves.
Significant curve exposure between 2Y and 10Y. Sensitive to steepening/flattening.
Duration Hedge Calculator
Calculate the notional amount needed to hedge your position's duration risk.
To neutralize the $10.00M position's $8,011 DV01 exposure, short $10.12M of 10Y Treasury.
The Math (For Reference)
Duration has two main flavors:
Modified Duration
The percentage price change for a 1% (100bp) yield move:
Price change = negative duration x price x yield change
Example: A bond with modified duration of 8.03 and price 99.80 loses approximately 8.01 points if yields rise 1%.
DV01 (Dollar Value of 01)
The dollar price change for a 1 basis point (0.01%) yield move:
DV01 in dollars per $100 face value
Example: Your $10.0M position has $8,011 DV01. That's how much you make or lose per basis point move.
Trade Examples (Simple)
Here are three real-world scenarios that show why duration matters:
Example 1: The Naked Long (No Hedge)
You buy $10M of 10-year Treasuries at 4% yield. Duration is 8.5 years. Your DV01 is $8,500/bp.
You don't put up $10M cash. You finance via repo: post ~2-5% margin ($200K-500K), borrow the rest. The repo rate is your financing cost. Typical leverage: 10-20x. If repo rate is 4% and your bond yields 4%, you're only earning the spread on your margin.
Surprise inflation print. Yields spike 50bps to 4.5%.
50bps x $8,500/bp = -$425,000 loss
You owned bonds with no protection. Rates rose half a percent. You lost $425K in a day. This is why duration matters.
Example 2: The Hedged Position
Long $10M 10Y (DV01 = $8,500), short $23M 2Y (DV01 = $8,500). Net DV01 = $0.
Long leg: Finance $10M 10Y via repo, post ~$500K margin. Short leg: Borrow $23M 2Y via reverse repo, sell them, invest proceeds. Net funding is roughly neutral since you're long and short similar dollar amounts. You earn/pay the difference in repo rates between tenors.
Same surprise - all yields rise 50bps.
Long 10Y loses $425K, short 2Y gains $425K = $0 net
You matched your DV01s so parallel rate moves don't hurt you. But you're still exposed if the CURVE changes shape.
Example 3: The SVB Disaster
Bank buys $100B of long bonds at 1.5% yield, funds with short-term deposits at 0%. Looks like free money.
Banks fund with deposits (0% cost in 2021) - way cheaper than hedge fund repo. Unlike hedge funds, banks don't mark-to-market daily on "held-to-maturity" securities. Looks great on paper until depositors want their money back. Then you're forced to sell at massive losses.
Fed hikes from 0% to 5%. Bond values crash, depositors want their money back.
$100B x 15% loss = -$15B+ underwater. Can't sell without realizing losses. Depositors flee. Bank fails.
They borrowed short and lent long without hedging. When rates rose, they were trapped. Duration mismatch killed a $200 billion bank.