Under pressure: Bond duration and rising rates

Two types of risk

In the current climate - featuring a rise in inflation, reduced bond buying by central banks, including the Federal Reserve and more fiscal spending on the way – bonds have come under pressure.

Make no mistake, however, bonds still merit inclusion in a broadly diversified portfolio. The primary role of bonds in a balanced portfolio is, of course, to provide diversification for equities. At the same time, however, rising rates can actually lead to higher total returns from bonds for investors whose investment horizon is longer than their bond portfolio duration. How interest rates affect coupons and prices Government bond investors are exposed to two types of risk from interest rate movements. The first of these is reinvestment risk. When yields are falling, invest...