Parallel Shifts

In Vol. 4, pg. 13, at the very bottom, it talks about the major source of risk for most bonds to the yield curve. Point no.1 is a parallel shift in the yield curve. Then, at the very end, it says, among the 3 points, the first component (parallel shift) typically accounts for about 90% of the change in the value of a bond. Next page, under duration, it says, “because parallel shifts in the yield curve are relatively rare, duration by itself is inadequate to capture the full effect of changes in the interest rates”. I am not a FI analyst, but doesn’t the above two points contradict each other???

yeah, i did a double take there as well. Nothing to get hung up on, but I guess their point was shifts in the yield curve make up 90%. I actually remember readiing somewhere shifts and twists (non-parallel) make up 95% of the change in value of bonds. CFAI likes to contradict itself.

You’re probably just overthinking this a little bit. They are stating that purely parallel shifts almost never occur, but when yields change then 90% of it will be due to a parallel shift, with the other 10% coming from a twist/butterfly shifts. So maybe the shift is parallel for 1-10 year rates but the 30 year jumps higher for some reason. Nothing to get too caught up on.

OK…thanks for that guys. Lesson to be learnt: need to stop overthinking !!