Transcript:

With interest rates having fallen to historic low levels this year, investors are understandably questioning what to do with the duration in their portfolio.

Duration is a measure of the interest-rate sensitivity of a bond portfolio: how much bond prices move as interest rates move up and down.

As interest rates fall, longer duration bond portfolios generally appreciate more. And as interest rates rise, longer duration portfolios generally sell off more.

Amid the dramatic sell-off in risk assets earlier this year as the global pandemic took hold, government bonds served as one of the few true offsets to equity and credit market volatility.

While high-yield markets were off more than 12% during the first quarter, US Treasuries—one of the purest sources of duration—were up more than 8% on average during the first quarter at a time when US Treasury yields were already at relatively low levels.

Now while global government bond yields are at very low levels today, we don’t see the risk of a significant spike in interest rates in the near term, since central banks are committed to easy policies. So, in our view, it makes sense to have duration in a bond portfolio to mitigate the potential downside risks.

But how you take that duration really matters.

And we suggest pairing an appropriate amount of true government bond duration with some allocation to credit markets. Pairing the two together—in this environment of significant uncertainty—tends to provide a better outcome over time, since the two typically offset one another, with one performing well when the other is out of favor and vice versa.

But keeping that true duration anchor is really important to help weather the bouts of volatility that inevitably hit our markets.

Erin Bigley is a Senior Investment Strategist for Fixed Income at AB.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to change over time.

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