The Fed raised interest rates for the first time since 2018 this week. What does that mean for you? Most people have a general idea that bonds lose value when interest rates rise. Do you know what to expect from your bonds? Bond geeks did you a favor. They have a measure of interest rate sensitivity called duration.
Duration is a measure of how much the price of a bond will move based on a move in interest rates. If a bond portfolio has a duration of 5, it will lose about 5% of value when interest rates rise by 1%.
A few factors go into the calculation of duration, but the biggest factor is average bond maturity. The longer the maturity, the higher the duration. A high duration was really good as interest rate fell from 1981-2021. It boosted bond returns most years. It hasn’t been a good thing this year. Short-term bonds and floating rate bonds have fared much better in this tough interest rate environment.
Coming back to you, how is your bond portfolio positioned today? What’s your duration?
About the Author: John O’Connor
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