Resource Logo

Hello, you are using an old browser that's unsafe and no longer supported. Please consider updating your browser to a newer version, or downloading a modern browser.

Receive Updates
Resource Arrow Back to all
Date: March 12, 2018
Category: Credit

Managing Duration in Your Fixed-income Portfolio

All investments involve some level of risk – and managing that risk is an important part of your overall investment plan. If you’re looking to minimize risk by allocating to bonds, there’s an important term you should know and understand: duration. You may be asking, “What does it mean, and how does it affect my investment choices?”

To answer these questions, you must first understand how bonds are impacted by interest rate changes. If you hold a bond paying a five percent interest rate, but rates then fall to four percent, that bond you own is more valuable than one you could purchase on the open market. After all, five is better than four. On the other hand, if rates rise, the bond you currently own is less valuable than new bonds paying larger yields.

Duration measures (in years) how drastic the rise or fall of your bond’s value may be when interest rates move. It’s a valuable tool to measure your bond’s interest rate risk. Typically, the higher the duration, the more the bond’s value will fall as rates rise. Bonds with a lower duration are usually less sensitive to rising or falling rates.

If a bond’s value falls, how attractive will it be on the open market? No one will be knocking down your door if the market is full of bonds paying higher interest income. In that case, you are stuck with a bond decreasing in value or are forced to sell it at a discount.

If you expect current interest rates to continue their march higher, bonds with a shorter duration may be appealing as they would pay back their principal sooner, letting you purchase new bonds with higher potential income and potentially less interest rate sensitivity.

Why duration is important

Duration is a valuable tool if you plan to sell your bonds prior to maturity. No matter what happens to interest rates, if you buy a 20-year bond for $2,000, you will get back your principal after 20 years. However, if you plan on selling that bond before that end date, you will want to keep tabs on how interest rate risk may impact your bond portfolio.

If you aren’t bothered by volatile markets, consider long-duration bonds. If you’re risk-adverse, bonds with a shorter duration may be a better bet. If you want to avoid this juggling act altogether, there are alternative fixed-income solutions with very short durations, like senior secured loans. These loans are benchmarked to LIBOR and adjust to changes in interest rates typically every 90 days.

Duration is just part of the equation

Keep in mind that duration only measures one part of overall bond risk.1 It’s important to look at a bond’s credit risk, as non-investment grade securities like some high-yield bonds react to investor concerns about defaults as much as they do to changes in interest rates. You will also want to examine a bond’s liquidity risk by determining if there’s a robust seller’s market. Government bonds may find many available buyers, but the same isn’t always true for corporate bonds.2

Generally, if you’re looking at fixed-income securities for risk-adjusted income during periods of market volatility, make sure you factor interest rate risk into the equation. Every bond and bond fund has a duration, so knowing this number may be a useful tool when determining your appetite for interest rate risk. While many bonds are perceived as “safer” investment, those susceptible to rising rates may see a loss in value.

1 PIMCO. Understanding Investing: Duration.

2 Investopedia. Six Biggest Bond Risks. 1/20/17.
 
This information is educational in nature and does not constitute a financial promotion, investment advice, or an inducement or incitement to participate in any product, offering or investment. It is not intended to be used as a tool to determine your specific financial situation, tax status, investment objectives, investment experience, suitability for any specific investment, risk tolerance or investment profile. Resource is not adopting, making a recommendation for or endorsing any investment strategy or particular security. The materials included herein are the property of Resource and may not be repurposed in a separate likeness without the express written consent of Resource.

Receive Updates

* These fields are required.

Emails and white papers can only be sent to financial advisors in Resource’s broker-dealer partnership network.

Resource is the marketing name for Resource Real Estate, LLC, Resource Alternative Advisor, LLC, and their affiliates. Resource may distribute certain products through Resource Securities LLC, a wholly owned broker/dealer, Member FINRA/SIPC

All statements and information other than statements of historical fact included on this website regarding strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. When used on this website, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. You should not place undue influence on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make on this website are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved because of the number of risks and uncertainties, many of which are beyond our control, including but not limited to uncertainties concerning the properties being operated and sold or refinanced, leverage and meeting debt service obligations, operating properties in different locations throughout the U.S., general, market or business conditions and changes in laws or regulations. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. To check the background of Resource Securities LLC or any registered individual, please go to FINRA’s BrokerCheck.