I'm struggling to understand the meaning of US treasury total return.

What is easily available to get is yield data. Yield can be directly translated to the bond price at that time. In other words, even if yield uses % unit, this represents the percentage of discount from the principal. (here)

However, I don't think it means any sort of return. I found that there are some sources (e.g. Merrill) which report US treasury index value, price return, and total return. (I think what 'total' means is that they take account of coupons and everything.)

I'd like to know how to translate [yield ---> index ---> return]. If possible, I want to know deep level technical (mathematical) details, as well as intuition.

p.s. @haginile commented on a similar question here, but he didn't explain why it is hard to calculate return from yield. Also his blog link is broken.


3 Answers 3


Let's start with a single bond. The total return from time $t_0$ to time $t_1$ can be easily calculated as follows:

$$ R = \frac{\text{ending price} + \text{ending accrued interest} + \text{coupon payments between $t_0$ and $t_1$}}{\text{starting price} + \text{starting accrued interest}} - 1. $$

(This is no different from how you'd calculate the total return on a stock or any other assets: $(P_1 + \text{dividend}) / P_0 - 1$).

If you know exactly who the bond is (i.e., if you know the coupon and maturity), then given the yields to maturity at both $t_0$, and $t_1$, it is trivial to calculate the corresponding prices and accrued interests. From there, computing total return is also trivial.

The problem is, what if you don't know the coupon and maturity of the bond? In that case, approximations or assumptions are involved. Fortunately, a bond's total return can be (well) approximated from: $$ R = \text{yield income} - \text{duration}\cdot \Delta y + \frac{1}{2} \cdot \text{convexity} \cdot (\Delta y)^2, $$ where yield income can be approximated by $\text{yield}_0 \times \Delta t$. For instance, if yield is 5%, then yield income for a month is simply $5\% / 12$. If you have duration and convexity statistics, then you can approximate the total returns pretty well.

Now let's go to the index level. For an index, you basically repeat the total return calculation above for every single bond included in the index. The total return of the overall index is simply the market-value weighted average of the constituents' returns: $$ R_\text{index} = \sum_{i=1}^N w_i R_i. $$ (This is also similar to how an equity index total return is calculated.)

At this point, we may have several problems:

  1. Do we have all the constituents of the index?
  2. Do we know their market values?
  3. Do we have each bond's pricing information?

For the US Treasury index, these are probably not issues. But for most other indices, you probably don't have the underlying data. In these cases, approximations are required. Fortunately, most index vendors do publish an index's yield, effective duration, and convexity, so the approximation formula above can be applied at the index level.

There are a lot of intricacies involved if you want accurate total returns, but that's why these index vendors exist. The last edition of the Lehman Brothers Global Index Guide (2008) was 336 pages...

  • $\begingroup$ I've heard bonds are quoted in clean price (= dirty price - accrued interest). In the first formula above, I believe price +/- accrued interest is to properly adjust the actual price that you are going to pay/receive. Since you are using + sign in the numerator and - sign in the denominator, I got confused. Can you add bit more explanation? $\endgroup$
    – J. Lee
    Commented Jan 21, 2016 at 12:17
  • $\begingroup$ In the second formula, if I call yield at t0 as y(t0) and yield at t1 as y(t1). I belive Delta_y means y(t1) - y(t0). The duration and convexity parts give you the percentage change in the price, which is essential part of the first formula. However, can you define "yield income"? Is this to capture "coupon / (starting price - stating accrued interest)" part? If so, can you provide any simple mathematical formula? $\endgroup$
    – J. Lee
    Commented Jan 21, 2016 at 12:17
  • $\begingroup$ Lastly, in the three problems that you mentioned, why do we need "each bond's pricing information"? According to your formula, wi and Ri (which need D&C) are required, but not necessarily price. (ps) Did you move your blog address? If it is still alive, can you tell me the address? I am interested in your result. $\endgroup$
    – J. Lee
    Commented Jan 21, 2016 at 12:18
  • $\begingroup$ 1) The minus sign is a typo, sorry. And you're right – accrued int is used to account for what you actually pay/receive when you sell/buy bonds. 2) I've updated the answer with a definition for yield income. Yield is used, rather than coupon, to take into account pull-to-par effect. 3) If you have each bond's pricing information, then you can compute total return accurately and perfectly. It's in cases where you don't have the pricing information that you have to resort to D&C for approximation. $\endgroup$
    – Helin
    Commented Jan 21, 2016 at 14:37
  • $\begingroup$ In what scenario would you not know the maturity and coupon of a bond for which you're looking to calculate the total return? Is this for baskets? $\endgroup$
    – Jared
    Commented Aug 27, 2018 at 22:02

Assume you have the time series of 10-year Treasury constant-maturity yield $\{y_t\}$ from FRED (here), you can calculate the total return $R_t$ from $t$ to $t+\Delta t$ as following.


$$ \text{Daily: } \Delta t = 1/365 $$ $$ \text{Monthly: } \Delta t = 1/12 $$ $$ \text{Yield change: } \Delta y = y_{t+\Delta t} - y_t $$ $$ \text{Maturity: } M = 10 $$

Then the total return is

$$ R_t = \text{yield income} - \text{duration}\cdot \Delta y + \frac{1}{2} \cdot \text{convexity} \cdot (\Delta y)^2, $$


$$ \text{yield income} = (1+y_t)^{\Delta t}-1 \approx y_t {\Delta t} $$ $$ \text{duration} = \frac{1}{y_t} {z_t}^{2 M} $$ $$ \text{convexity} = C_1 - C_2 $$ and $$ z_t = 1+\frac{y_t}{2} $$ $$ C_1 = \frac{2}{y_t^2} (1-{z_t}^{-2 M}) $$ $$ C_2 = \frac{2 M}{y_t} {z_t}^{-2 M - 1} $$.

This formula is based on Tuckerman (2012) and Swinkels (2019).

  • 2
    $\begingroup$ Nice. The Swinkels (2019) paper even has a spreadhseet attached to it which performs the calculations. $\endgroup$
    – nbbo2
    Commented Aug 16, 2020 at 23:48

I suggest the following:

$$R_c=θ\Delta t-Mdur\Delta y+\frac{1}{2}[Cvex-Mdur^2](\Delta y)^2 +(1+y)^{-1} \Delta y \Delta t)$$


$R_c =$ continuously compounded return

If desired, $R_a =$ annualized simple return $\approx \exp^{R_c}-1$


$y$ = yield to maturity

Mdur = Modified duration, defined by $Mdur=-\frac{1}{P_0}\frac{\partial P}{\partial y}$

Cvex = Convexity, defined by $Cvex=\frac{1}{P_0}\frac{\partial^2P}{\partial y^2}$

Source: Bo Johansson, A note on approximating bond returns allowing for both yield changes and time passage, 2012. Equation 5.(link).

  • $\begingroup$ Interesting. Koivu and Pennanen Reduced form models of bond portfolios provides a similar formula but without the last term (their equation (6)). arxiv.org/pdf/1011.3246.pdf $\endgroup$
    – Alex C
    Commented Mar 19, 2019 at 18:36

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.