Why duration is important

13 July 2022 (3 min read)

Inflation video series : Module 3 - Why duration is important

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.

Fixed income

Inflation can erode the real returns of investments however tools like inflation-linked bonds could help investors mitigate the effects of inflation on their portfolio.

Find out more

Watch the other modules from our inflation series

The objective of this series is to make inflation-linked bonds investing simple to investors.

Inflation

Module 1 - Adding to the toolkit: inflation-linked bonds

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