How is key rate PV01 computed and what does it tell me that duration doesn't?

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AcadiFi · Accepted Answer

Key rate PV01 (sometimes called KR01) measures the dollar change in portfolio value for a 1-basis-point shift in a specific key rate on the yield curve, holding all other key rates constant. It decomposes duration risk by curve tenor, revealing positioning that a single duration number hides.

Computation:

Step 1: Select key rate tenors. A common choice: 3m, 2y, 5y, 10y, 30y.

Step 2: For each key rate, shift the curve by +1 bp at that tenor only, with linear interpolation tapering back to zero at adjacent key rate points.

Step 3: Revalue the portfolio under this perturbed curve. Compute the dollar change from base.

Step 4: Repeat for each key rate.

The sum of all key rate PV01s approximately equals the portfolio DV01 (for a parallel shift).

Example — Grosvenor Bond Fund at $500M market value shows these KR01 exposures (positive means portfolio loses money if that rate rises):

| Key Rate | KR01 ($000) |
|---|---|
| 3m | 4.2 |
| 2y | 12.8 |
| 5y | 38.4 |
| 10y | 62.1 |
| 30y | 18.3 |
| Total DV01 | 135.8 |

What this tells us beyond duration:

1. Curve shape exposure. A flattener trade (long 30y, short 5y) would show negative 5y KR01 and positive 30y KR01, netting to near-zero duration but substantial curve risk. A single duration number reports zero; KR01 reveals the bet.

2. Butterfly exposure. A 2y/5y/10y butterfly has positive 5y KR01 and negative 2y/10y KR01s summing to zero, again a curve-shape play invisible to duration.

3. Hedging precision. If a portfolio manager wants to hedge the 10y KR01 specifically (because FOMC is about to move the belly), they can short 10y futures calibrated to that $62.1K exposure without affecting other tenor exposures.

4. Risk budgeting. Risk limits by key rate force managers to diversify across the curve rather than loading up at a single tenor.

Key rate PV01 assumes the curve shift is isolated to a neighborhood. For correlated shifts (e.g., the curve often bull steepens), a PCA-based factor PV01 is more informative — it reports exposure to level, slope, and curvature principal components.

How is key rate PV01 computed and what does it tell me that duration doesn't?

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