Dollar Duration and DV01 Basics

Duration tells you percentage sensitivity. DV01 tells you dollar sensitivity. That distinction matters the moment you manage real money. A portfolio manager with $10 million in bonds needs to know that a 1 basis point yield move costs (or gains) exactly $6,500—not just that duration is 6.5 years. The practical translation from percentage to dollars is what makes position sizing, hedging, and risk budgeting possible.

What DV01 Actually Measures (Why This Matters)

DV01 stands for "Dollar Value of One Basis Point." It answers a specific question: How many dollars does my position gain or lose when yields move by 0.01%?

Modified duration tells you that a bond with 6-year duration loses approximately 6% of its value when yields rise 1% (100 basis points). That's useful for understanding sensitivity in percentage terms. But when you're managing a $25 million portfolio, you need to know the actual dollar impact—and that's where DV01 comes in.

The formula is straightforward:

DV01 = Modified Duration x Market Value x 0.0001

The 0.0001 converts from 100 basis points (the standard duration reference) to 1 basis point. The point is: DV01 transforms an abstract percentage into a concrete number you can budget, hedge, and manage.

Real DV01 Values: What the Market Looks Like

Treasury futures DV01s per $1 million par value reveal how dramatically dollar sensitivity scales with maturity (Ho and Lee, 2024):

Source: CME Group Treasury Futures specifications.

• 2-year Treasury Note: $185 DV01
• 5-year Treasury Note: $450 DV01
• 10-year Treasury Note: $850 DV01
• 30-year Treasury Bond: $2,131 DV01

The practical implication: a 1 basis point yield increase on a $1 million 30-year Treasury position costs $2,131, while the same move on $1 million in 2-year notes costs only $185. That's an 11.5x difference in dollar risk for the same notional amount.

Why this matters: Position sizing by notional amount alone is dangerous. A $5 million allocation to 30-year bonds has over 10x the dollar interest rate risk of $5 million in 2-year notes.

DV01 Calculation: A Complete Example

You manage a $10 million corporate bond portfolio with a modified duration of 6.5 years. What's your DV01?

Step 1: Apply the Formula

DV01 = 6.5 x $10,000,000 x 0.0001

Step 2: Calculate

DV01 = $6,500

Step 3: Interpret

Your portfolio gains or loses $6,500 for every 1 basis point move in yields. A 25 bp rate increase means a $162,500 loss (25 x $6,500). A 50 bp decline means a $325,000 gain.

The durable lesson: DV01 makes abstract duration concrete. When your client asks "what happens if rates rise 0.25%?", you answer in dollars, not percentages.

Why DV01 Matters for Position Sizing

The same modified duration applied to different position sizes produces vastly different dollar risks:

The practical point: When a portfolio manager says "I have $65,000 in DV01," they're communicating dollar risk independent of position size. That's why DV01 is the standard language for risk budgeting in bond trading.

Dollar Duration vs. DV01: The Relationship

These terms are related but not identical:

Dollar Duration = Modified Duration x Market Value

This gives you the dollar change for a 1% (100 bp) yield move.

DV01 = Dollar Duration / 10,000

This gives you the dollar change for a 0.01% (1 bp) yield move.

Using our $10 million portfolio example:

• Dollar Duration = 6.5 x $10,000,000 = $65,000,000
• DV01 = $65,000,000 / 10,000 = $6,500

The test: When someone quotes "dollar duration" vs. "DV01," check which reference rate change they're using. The numbers differ by a factor of 10,000.

DV01-Weighted Hedging: How Traders Match Risk

A common mistake is hedging notional-for-notional (matching dollar amounts). Professional traders hedge DV01-for-DV01 instead.

Setup

You own $10 million in 10-year corporate bonds (duration 7.2 years, DV01 = $7,200). You want to hedge interest rate risk using 5-year Treasury futures.

The Wrong Way

Match notional: sell $10 million in 5-year Treasury futures. But 5-year futures have lower duration than 10-year corporates—you're underhedged.

The Right Way

Match DV01. If 5-year Treasury futures have DV01 of $450 per $1 million:

Contracts needed = Portfolio DV01 / Futures DV01 per contract

$7,200 / $450 = 16 contracts (assuming $1 million contract size)

The point is: DV01 matching ensures dollar-for-dollar offset when yields move, regardless of maturity mismatch.

Curve Trades: Using DV01 for Steepeners and Flatteners

Professional traders construct curve trades by matching DV01 to isolate spread movements from parallel shifts.

Example: 2s10s Steepener

You believe the yield curve will steepen (2-year yields fall relative to 10-year yields). To profit without taking directional rate risk:

• Long 2-year Treasury futures (DV01 = $185 per contract)
• Short 10-year Treasury futures (DV01 = $850 per contract)

To be DV01-neutral (immune to parallel shifts):

Ratio = 10-year DV01 / 2-year DV01 = 850 / 185 = 4.6

For every 10 contracts of 10-year futures sold, buy approximately 46 contracts of 2-year futures (CME Group, 2024).

Why this matters: If you get the ratio wrong, you're exposed to the overall level of rates, not just the spread. DV01 matching isolates the trade to curve shape.

Detection Signals: You're Likely Misusing DV01 If...

• You compare DV01s across positions without adjusting for position size (a $50 million position with $5,000 DV01 isn't "less risky" than a $5 million position with $3,000 DV01—it's actually lower duration)
• You hedge by matching notional amounts instead of DV01
• You quote duration percentages to a client who asked about dollar impact
• You size positions by notional without considering DV01 per dollar invested
• You're surprised when your "hedged" position still moves with rates (mismatched DV01)

Checklist: Essential DV01 Applications

Essential (use these first)

• Calculate portfolio DV01 to know exact dollar impact of 1 bp yield move
• Match DV01 when hedging rather than notional amounts
• Express risk budgets in DV01 for consistent cross-portfolio comparison

High-impact refinements

• Decompose DV01 by key rate to understand curve exposure at 2y, 5y, 10y, 30y points
• Monitor DV01 drift as bond prices change (DV01 increases when bond prices rise)
• Use DV01/notional ratio as a quick duration proxy for position comparison

Your Next Step

Calculate the DV01 of your bond holdings (or a bond ETF you're considering). Take the fund's stated duration, multiply by your position value, then divide by 10,000. That single number tells you exactly how many dollars you gain or lose per basis point move. For a $50,000 position in an aggregate bond fund with 6-year duration, your DV01 is $300—meaning a 25 bp rate increase costs you $75. Run this calculation before your next rebalancing decision.

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Related: Modified Duration and Price Sensitivity | Macaulay Duration Calculation Walkthrough | Using Futures and Swaps to Adjust Duration