Duration

What Is Duration?

Duration measures how much a bond's price changes when interest rates move. Modified duration is the most commonly used version: a bond with a modified duration of 7 will fall in price by approximately 7% if yields rise by 100 basis points (1%), and rise 7% if yields fall by 100 bps.

Why It Matters Beyond Individual Bonds

Duration is the key risk metric for all fixed income portfolios. When central banks raise rates, everything with duration loses value. This was the brutal lesson of 2022, when even "safe" long-duration Treasuries lost 30%+ — because they carried enormous duration risk.

What Drives Duration

• Coupon rate: Lower coupon bonds have higher duration (more of their cash flow is deferred further into the future)
• Maturity: Longer maturity = higher duration
• Yield level: At lower yields, duration is higher — bonds are more interest-rate sensitive at low yield levels

Duration Extension Risk

When yields fall, the duration of bonds extends (callable bonds excepted). This means falling rate environments can perversely make bond portfolios more sensitive to subsequent rate rises — the convexity effect.

Portfolio Duration Management

Active bond managers constantly adjust portfolio duration based on their rate outlook. "Long duration" bets on falling yields; "short duration" bets on rising yields or hedges against a rising rate environment.

Duration as a Term in Analysis

When macro analysis mentions "long duration" assets, it often means assets whose value depends on distant future cash flows — including not just bonds but also growth stocks and infrastructure. These assets are particularly vulnerable to a rising rate environment.