Duration, Explained: The Number That Runs Fixed Income

Foundations

Duration measures how much a bond’s price moves when interest rates change. A bond with a duration of seven loses roughly 7 per cent of its value if yields rise one percentage point, and gains roughly 7 per cent if they fall. It is the single most important number in fixed income, because it converts a view on rates into an expected profit or loss.

What drives it

Duration is essentially a weighted average of how long you wait for a bond’s cash flows. Long-maturity bonds have high duration; high coupons and high yields shorten it, because more of your money comes back sooner. A 30-year government bond can carry a duration near 20, while a two-year note sits near two, which is why long bonds swing violently on the same rate move that barely dents the front end.

Duration as a position, not just a measure

When investors say they are “adding duration”, they are buying rate sensitivity on purpose: positioning for yields to fall, typically because growth is slowing or cuts are coming. “The case for duration” is therefore shorthand for the case that rates have peaked. The trade cuts both ways, as 2022 demonstrated when long-duration bonds suffered equity-sized losses in a rising-rate year.

Beyond bonds

The concept stretches across markets. Growth stocks are long-duration assets, because most of their value sits in distant cash flows, which is why they are disproportionately sensitive to the discount rates set in the bond market. When commentary links a tech selloff to rising long yields, duration is the mechanism doing the work.