Surfing the Roll
The yield curve reflects the interest rate relating to each maturity year presented on a graph. Since long-term interest rates are generally different from short-term interest rates (normally, longer term rates are higher), the graph has a slope or curve to it. This analysis presents an assessment of the impact of buying a bond and enjoying the built-in appreciation that occurs as a normally higher-interest-rate bond becomes a valuable shorter-term bond (the “roll”). Obviously, changes in overall interest rates affect both positively and negatively the impact of “rolling” down the curve. However, this dynamic provides some built-in protection against the adverse impact of rising interest rates and helps investors who want to increase the yield of their portfolio by investing in longer-maturity fixed-income securities (bonds).