Duration equivalent bond swaps: A new tool.

This article discusses strategies for choosing between a single Treasury security and a duration-equivalent combination of two Treasury securities based on their relative returns and some measures of yield curve twist risk. Where the yield pick-up available from achieving duration from one set of securities rather than another is largely relative to the risk, the investor should strongly prefer this security choice to its alternative. This paper attempts to develop a convenient methodology for evaluation of duration-equivalent combinations. A methodology for evaluating yield curve twist risk consists of: measuring the probability distribution of the change in the yield spread between any two securities; and translating a one-standard-deviation twist into a required yield differential between the single security and the combination.