The duration of the Barclays Global Corporate Investment Grade Bond index has increased from 5.9 end of 2013 to 6.9 end of 2019. During the same time period, the yield-to-worst fell from 2.9% to 2.2% and the Sherman ratio decreased from 0.5 to 0.3.
A Sherman ratio of 0.3 implies that interest rates have to increase by only 0.3% over the next 12-months to wipe out an investor’s entire yield. In other words, the lower the ratio, the less interest rates need to rise to offset an investor’s yield.
Formula: Sherman ratio = yield / duration.