Viewpoints

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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Disclosures

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.

Hypothetical and simulated examples have many inherent limitations and are generally prepared with the benefit of hindsight. There are frequently sharp differences between simulated results and the actual results. There are numerous factors related to the markets in general or the implementation of any specific investment strategy, which cannot be fully accounted for in the preparation of simulated results and all of which can adversely affect actual results. No guarantee is being made that the stated results will be achieved.

This material contains the opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world. ©2015, PIMCO.