1
$\begingroup$

One can create a constant maturity treasury (CMT) by building a zero coupon discount curve and generating constant maturity bonds from that curve. This allows one to look further back than is possible with the current 'actual' existing bonds.

I was told that CMT bonds account for modified duration, whereas actual bonds do not. The CMT bond accounts for modified duration precisely because it is created using a zero coupon curve.

Why is this?

$\endgroup$
  • $\begingroup$ “Account for the modified duration”. What do you mean by that ? $\endgroup$ – dm63 Dec 31 '18 at 18:15
1
$\begingroup$

if you use existing on the run bond yield for analysis. There are at least three ptoblems.

  1. The duration is change slightly every day
  2. on the run roll cause a yield jump
  3. actual yield influenced a lot by liquidy
$\endgroup$
1
$\begingroup$

I'm just guessing, but they might be talking about the continuity of time series. The chart below shows the modified durations of 10-year par bonds and rolling 10-year on-the-run Treasuries. As you can see, they have the same trends (as expected), but you don't have those jumps (caused by new on-the-run 10-year issues being issued).

enter image description here

$\endgroup$

Your Answer

By clicking "Post Your Answer", you acknowledge that you have read our updated terms of service, privacy policy and cookie policy, and that your continued use of the website is subject to these policies.

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