Duration & Convexity — Bond Risk Management

Overview

Duration measures a bond's price sensitivity to interest rate changes; convexity measures how duration itself changes. Together, they're essential for managing bond portfolio risk. These metrics tie directly into macro analysis because central bank rate decisions are the primary driver of duration gains and losses. Check our yield curve dashboard for real-time rate context, and apply these concepts when selecting bond ETFs for your portfolio.

Key Takeaways

• Modified duration: a 1% rate rise = ~duration% price drop (e.g., duration 5 → 5% loss).
• Longer maturity and lower coupons = higher duration = more rate sensitivity.
• Convexity is positive for most bonds — the price gain from a rate drop exceeds the price loss from a rate rise.
• Effective duration accounts for embedded options (callable bonds).

Practical Tips

• Check your bond ETF's effective duration on the fund fact sheet — it tells you rate risk at a glance.
• Shorten portfolio duration when you expect rates to rise; lengthen when you expect cuts.
• Zero-coupon bonds have the highest duration for their maturity — maximum rate sensitivity.