Duration: A dynamic lever in fixed income investing

Duration is a versatile tool in fixed income portfolios. It can be used to hedge credit risk, express macroeconomic views, and manage volatility. Its use can be either tactical or structural, depending on strategy objectives, guidelines, and market outlook.

Fixed income strategies are typically designed to capture alpha or mitigate risk over a defined horizon. Structural duration reflects a long-term strategic stance, often embedded in the portfolio’s mandate or philosophy. It’s less reactive and more aligned with the portfolio’s risk budget, income generation goals, or benchmark alignment. Tactical duration positioning is applied when opportunities appear attractive, often in response to anticipated monetary policy shifts, economic data releases, or yield curve distortions.

Myriad factors can influence changes in the yield curve. These include:

• Inflation and labor market conditions
• Central bank expectations
• Economic growth prospects
• Political and fiscal policy decisions
• Supply and demand dynamics

A cornerstone of fixed income active management is to identify possible mispricing in yield curves across markets and implement duration adjustments that can produce alpha as these dynamics evolve.

Return enhancement and diversification

For bond strategies that aim to deliver consistent, risk-adjusted returns by drawing on diversified sources of alpha, duration could play a strategic role in enhancing performance. Even though these types of strategies tend to have bottom-up security selection and sector-relative value baked into the investment process, pulling the duration lever in these types of strategies could help insulate against risks associated with moves in interest rates.

This type of tactical duration management is most common in benchmark aware strategies, where even small deviations from index duration can materially influence excess returns. With a clear reference point and defined risk budget, active managers can express high conviction rate views more efficiently, making duration a practical and frequently used lever in these benchmark relative portfolios.

Interest-rate anticipation can be volatile and may overwhelm more consistent, research-driven returns. Here, duration strategies could be employed if differentiated, high-conviction views emerge. Such views are often predicated upon fundamentally derived forecasts of US growth and inflation and supplemented by market indicators such as commodity prices and real interest rates. When a forecast for short-term interest rates diverges meaningfully from market-implied forward rates, investors can take tactical duration positions to capitalize on the expected convergence.

Managing duration within a well-diversified portfolio may ensure that no single source of alpha dominates performance. This disciplined approach allows duration to serve as a complementary lever — potentially enhancing returns while maintaining the consistency and balance the strategy aims to deliver.

Volatility management

Duration also plays a key role in unconstrained strategies designed to deliver diversified exposure across global credit markets. While credit risk is the primary driver of returns in this type of strategy, duration serves as a strategic counterbalance, helping to manage volatility and preserve capital in risk-off environments.

Because these strategies are not tied to benchmark duration targets, managers have greater flexibility to size duration purely for risk management rather than relative performance. This freedom allows duration to function as a stabilizing anchor — modulated up or down as market conditions dictate — without the need to track index-level rate exposure.

In this type of strategy, duration may be used tactically to hedge against spread widening and structurally to support portfolio resilience, rather than as a dominant source of alpha. This can enable downside-risk mitigation when credit markets sell off, and interest rates decline. At the same time, this can help preserve convexity and rolldown (the capital gain created by the natural fall in a bond’s yield — and rise in price — as it approaches maturity) in favorable rate environments.

A prudent approach for strategies with global credit exposure may be to maintain a positive structural duration, with tactical adjustments informed by independent macro forecasts. What’s more, evaluating duration in the context of credit exposure could help ensure a balanced risk-return profile across market cycles.

Disciplined and dynamic use of duration may help clients achieve more stable return profiles while maintaining exposure to higher-yielding credit opportunities. In our view, integrating macro insights with bottom-up credit selection could also benefit credit investors in this space.

Pursuing returns

In a global fixed income context, duration could play either a fundamental or technical role, depending on the particular strategy and its objectives. Strategies with a greater emphasis on fundamentals may consider duration in seeking to identify market dislocations at the intersection of macroeconomic trends and market pricing of risk. Strategies with a greater focus on technical analysis may consider duration in the context of measuring price movements. Ultimately, structural duration supports long-term portfolio resilience and seeks alignment with client mandates, while tactical duration aims to capitalize on mispricings and anticipated shifts in monetary policy.

Conclusion

In today’s dynamic fixed income landscape, duration remains one of the most versatile tools available to portfolio managers — whether used to hedge risk, express macro views, or enhance returns. We see potential applications across core, multisector, and global fixed income portfolios both structurally and tactically, depending on a strategy’s objectives and market outlook. Duration isn’t a one-size-fits-all lever, but a dynamic component of a broader investment toolkit that can help investors navigate changing market conditions and in pursuit of attractive risk-adjusted outcomes for clients.