Over the last month, bond yields have begun to climb. As the economy continues to recover, we expect the Federal Reserve will eventually take a more hawkish stance and slowly begin to raise interest rates. While an increase in the federal funds rate may still be up to a year away, we think it behooves investors to be mindful of the growing potential for rising interest rates and thus rising bond yields. Rising bond yields, in turn, mean falling bond prices as the two variables have an inverse relationship.
Particularly in this type of environment, we keep a close eye on bond duration. Bond duration is the calculation of an investment’s price sensitivity to a change in interest rates. Duration is expressed in a number of years. Although determining duration is a somewhat complicated calculation involving present value, yields, final maturity, call provisions, and sinking funds, there is good news in that bond and bond fund duration is a standard calculation. Duration is provided in the presentation of comprehensive bond and bond mutual fund information. Some digging may be required, but duration is disclosed.