You’re correct about the height. I think you were ribbing jg (whom I don’t know).
I thought it was a bit unfair of me to drag you through all that math and then leave it up to you and others to do the last step to get practical numbers you can use. So I went to that h.15 report I mentioned, which has daily closing data from 1962, and measured the historical variation in 10-year Treasury rates. Here are some results that might cut through the fog:
1. 90% of the time, the change in the 10-year Treasury rate since the last trading day (using closing prices) is 10bp or less, in either direction.
2. 99% of the time…. 25bp
To get variations over one month, just multiply by 5 (so changes are 50bp or less in either direction 90% of the time, and 125bp… 99% of the time).
If you’re looking at X months, multiply the monthly bp values above by sqrt(X).
At any one time, interest rate volatility can be higher or lower than the average from 1962 until now. Even our recent volatility in the bond markets is less than the average for 1962-2007, because the average includes lots of volatile years from the 1980’s. You could use 50-90% of the amount of variation quoted above in today’s environment. It’s been closer to 90% in the last few weeks, and was 50-60% for most of the last year.
SD R, I agree totally that the main point of all this is to have some awareness of this inability-to-lock-in risk (and thanks again for being the one to contribute that to us all).
