The Case for Duration in the Long Run​

Over the long term, bond investors are typically compensated for holding
interest-rate-sensitive investments.

An era of persistent low yields has prompted many investors to sell or outright go short duration in their fixed income portfolios. After all, many asked as they watched the U.S. 10-year Treasury slide below 2%, how long will it be before we can expect a reversal of the downward trend in interest rates? This could have them wondering, can we expect to be compensated adequately for holding interest-rate-sensitive investments?

Many investors made that move away from duration last year, and many of them probably regret it now. In 2014, flows proliferated into bond strategies that either seek to eliminate interest rate risk entirely or have the ability to outright short duration (and many did). By the end of the year, however, many of these strategies were hurt not only by the negative carry and the principal loss from falling rates, but also by the spread widening of volatile credit spread exposures.

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The Author

Jeroen van Bezooijen

Product Manager, EMEA Client Solutions and Analytics

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All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

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