Yield Sensitivity

Yield sensitivity describes how strongly the value of an investment or the income of a business reacts to changes in interest rates or market yields. For a bond, price and yield move in opposite directions: when yields rise, existing bonds with lower coupons become less valuable. Bonds with longer maturities and lower coupons are more sensitive. Analysts usually measure this with duration, the approximate percentage price change for a one percentage point move in yield, and express small moves in basis points. For banks, the term also covers how net interest margin shifts as rates change. Yield sensitivity is a core part of interest rate risk, and the unrealized bond losses that hit some US banks in 2023 showed what high sensitivity can mean. Also see yield curve.