To minimize risk in bonds it is important for investors to understand bond duration.
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In recent months we have seen a record influx of money flowing into longer duration bond funds in the reckless pursuit of yield.
If rates start rising and you have a high duration bond fund, the more likely you are to suffer losses in that bond fund, or age-based 529 college savings account.
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Shortening the duration of your bond portfolio means you receive cash sooner than longer duration bonds and therefore you can reinvest that cash sooner at higher interest rates in an inflationary environment.
And so actually, the same bond that is at 4% has a longer duration than the same bond at 2%.
Duration measures the amount of time until a bond matures, and longer-duration bonds fall harder when interest rates rise.
Professional investors continue to reduce duration on bond portfolios, many still well above 5 years.
For example, a bond fund with a duration of 5 years can expect to decrease in value 10% if interest rates increase 2%.
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Moreover, as bond coupons fall, their duration, or their sensitivity to interest rates swings, goes up.
My bond recommendations in 2012 ranged from high-yield to pipelines, refineries, autos and bond funds, all short duration.
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This is a fundamental characteristic of bonds which is calculated and quantified by the duration of the bond.
Maybe even over 100% of the return that was experienced in traditional bond funds was experienced through duration risk.
That would typically be a bond fund with an average duration of more than four years or a stock fund.
The exams test your knowledge of such things as how to calculate the duration of a bond and the ethics of accepting a stock tip.
This is especially true for longer duration bonds and bond funds.
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In these four periods of rising rates, managers had the acumen to navigate troubled waters by various techniques of managing bond types, sector allocation, duration, maturity, credit quality, country, and currency.
As of August 19, yields on almost every duration of T-Bond were lower than they were before the downgrade (the three-month issue was the lone exception, its yield rising from 0.01% to 0.02%).
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Individual investors can quantify their bond portfolios risk by knowing what their duration is.
In an environment when yields have been falling, that relatively long duration has paid off as bond prices jumped.
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But for companies that do not have that kind of capital on hand, they will likely issue longer maturing debt, which is bad for corporate bond holders that are invested in shorter duration debt as demand will go towards the longer dated bonds yielding more interest.
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In the junk bond sector, my decision was to avoid duration risk with a few exceptions.
Still, we are concerned for people with excessively large bond allocations especially ones including long duration Treasuries or leveraged mutual funds.
Osterweis Strategic Income has more credit risk but lower interest-rate risk (due to shorter average duration) than some intermediate-term bond funds.
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The longer the duration, the bigger the change in a bond's price for a given change in yield.
Expect the Federal Reserve Board to reinstitute its program of bond repurchasing, thereby driving down interest rates on long duration Treasuries.
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It will buy Japanese government bonds with maturities of up to 40 years, seeking to push the average duration of Bank of Japan (BoJ) bond holdings to seven years, from the current three years.
Leaked on Wednesday, markets players expected the OMT, which consists of bond purchases by the ECB in the secondary market of short duration, coupled with strict conditionality (preferably under IMF surveillance).
Also, mortgages have a duration (a calculation of the time it takes to get paid back) that is a variable, hypothetical duration that varies with prepayment speeds, so a short duration mortgage portfolio is not protection against a sudden increase in interest rates, because if interest rates rise the duration will rise which hurts the value of the bond.
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You also ought to have flexibility in your duration, the risk in the portfolio, and flexible bond investing requires that.
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