Duration
Duration measures sensitivity of a bond or rate-exposed asset’s value to changes in interest rates, often expressed in years.
Allocator relevance: A core interest-rate risk input that affects portfolio construction, risk budgets, and drawdown behavior in rate shocks.
Expanded Definition
Duration approximates how much a bond’s price will change for a given change in yields. Higher duration typically means greater sensitivity to rate moves. Duration applies not only to traditional fixed income but also to rate-sensitive credit and any cash-flow stream whose value depends on discount rates.
In allocator portfolios, duration management often interacts with liquidity needs, spending policy, and correlation to risk assets during macro regime shifts.
How It Works in Practice
Allocators measure duration across fixed income sleeves, stress test parallel and non-parallel rate shifts, and adjust exposures based on macro assumptions and risk limits. They also consider credit spread duration separately from rate duration in spread-driven markets.
Decision Authority and Governance
Risk limits typically set duration ranges by sleeve and define escalation thresholds when duration drifts outside bounds. Governance ensures duration is managed intentionally rather than as an accidental byproduct of yield chasing.
Common Misconceptions
- Higher yield always compensates for higher duration.
- Duration only matters for government bonds.
- Duration is stable regardless of market conditions.
Key Takeaways
- Duration is a direct rate-risk measure.
- Rate regimes can dominate portfolio behavior.
- Duration should be managed alongside spread risk and liquidity.