Why duration is important
- 13 July 2022 (3 min read)
Why duration is important
Inflation-linked bonds are not floating rate notes but they are still sensitive to interest rate fluctuations. This is because they have duration. Duration plays an important role when it comes to inflation-linked bonds, so investors should be aware of how it works and the impact it can have.
For inflation-linked bonds, the higher the duration, the more sensitive the bond is to real interest rate changes. This is important for investors to be aware of as they may want to consider different duration strategies depending on interest rate movement expectations.
Remember: all inflation linked bonds from a given issuer are indexed to the same inflation rate, regardless their maturity.
Short maturities inflation linked bonds have grown in popularity recently as investors that are willing to capture inflation indexation without getting excessive duration exposure
Source: AXA IM, Datastream – as at 31 May 2022 for illustrative purpose only and subject to change
In these two charts, the inflation indexation is the same for all maturities and short duration however, what differs is the impact of bond yields moving up & down.
In conclusion, short duration inflation-linked bonds are most sensitive to inflation itself and when the overall maturity of an inflation-linked bond portfolio is extended, the risk changes from being sensitive to oil and inflation into a more “bond-like” instrument.
Disclaimer
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.