Natalia Lojevsky
Natalia Lojevsky

The Duration Equation

Income Insights

The Duration Equation:

  • What is duration? It is a risk by definition. The risk that the value of a fixed rate bond will decline or rise as a result of a change in interest rates.
  • As the name implies, fixed income instruments fix their coupon rate for a longer term. This does not adjust no matter what happens to interest rates or what adjustments the Federal Reserve will make to its interest rate policy, as they have recently indicated.
  • This is the rate sensitive part of fixed income that exposes investors to duration.
  • Rising rates are a headwind to traditional fixed income portfolios (Treasuries, municipal bonds, investment grade bonds, high yield bonds, emerging market bonds, etc.) as holders of these instruments would now be able to obtain a theoretical higher rate of return than the one locked in at purchase of their fixed rate coupon.
  • How much pain can duration create in YOUR fixed income portfolio?
  • Historically, if interest rates change by 1%, a fixed income instrument’s price is likely to experience an inverse change by approximately 1% for each year of duration.
  • Here is the duration math at a glance –

Source: https://cafemutual.com/news/guestcolumn/63-lessons-to-be-learnt-from-the-recent-events-in-bond-markets

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Natalia Lojevsky
Natalia Lojevsky
Natalia Lojevsky – Executive Director, Investor Solutions at CIFC Investment Management LLC. CIFC is sub-advisor to a floating rate income strategy at Catalyst Funds. Ms. Lojevsky has 13 years of experience working in the global financial markets. Prior to joining CIFC, Ms. Lojevsky served as the Head of North American Distribution for CI Capital, the investment banking arm of Commercial International Bank, where she was responsible for all aspects of CI Capital’s US-based business and the distribution of its multi-asset offering to a broad base of institutional investors including pension funds, mutual funds, hedge funds and endowments Ms. Lojevsky holds a B.S. in Biology from American University and has passed the NASD Series 7 and 63 exams.

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