A Note On Representing Arbitrary Yield Curve Reshaping Sensitivities Using Key Rate Durations

Wesley Phoa, Ph.D. and Michael Shearer, Ph.D.

Yield curve reshapings (non-parallel yield curve shifts) are critical to bond performance: typical reshapings include changes in the slope or curvature of the yield curve and the formation of humps at the short end of the yield curve. This note shows how to calculate the sensitivity of a bond portfolio to a completely arbitrary yield curve reshaping as a linear combination of key rate durations. The computations are straightforward, and can be implemented using a spreadsheet.