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Duration – what is it and what does it mean for bond investors?

We look at what duration is, why it matters, and how it can impact your investments.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

A simple bond will pay interest throughout its lifetime, and then the principal amount at the end of term. Bond duration is a way of measuring how much bond prices are likely to change if interest rates move. It tells you the time it will take for a bond to repay its value to you.

To fully understand duration, you firstly need to get to grips with how interest rates and bond prices are related. They move in opposite directions. When interest rates rise, the prices of bonds tend to fall. And when interest rates fall, the prices of bonds tend to rise.

As a general rule, for every 1% increase in interest rates, a bond's price will fall by about 1% for every year of duration. And on the flip side, for every 1% fall in interest rates, a bond's price will rise by about 1% for every year of duration. So duration can be thought of as a measure of the sensitivity of price to a change in interest rates. Remember past performance is not a guide to the future. All investments and any income they produce can rise as well as fall in value so you could make a loss.

What can it mean for your bond fund?

Here’s an example of how interest rate changes could affect the price of a bond or bond fund based on its duration. Remember though, this is just an example, there are a lot of other things that can impact a bond’s price.

Duration Interest rate change Approximate bond price change
4 years +1% -4%
4 years -1% +4%

The table shows that if a bond has a duration of four years, and interest rates increase by 1%, the bond’s price will fall by around 4%. And, if a bond has a duration of four years and interest rates fall by 1%, the bond’s price will rise by around 4%.

Duration can have a big impact on bond returns, so it’s important to get it right. We asked Stuart Edwards, manager of the Invesco Tactical Bond, which sits in the IA £Strategic bond sector and features on the Wealth Shortlist, how he’s invested his fund with this in mind.


Barring a few exceptions, the bond bull market has stood largely intact for almost 40 years. At the heart of this stood big dis-inflationary trends supported by a number of factors: inflation targeting by central banks, globalisation, demographics, technology and the global financial crisis. Many of these won’t disappear abruptly, but their power and influence may wane. Add in other potentially inflationary factors such as the transition to net zero and it’s not too much of a stretch to think that these long-term structural forces might be shifting.

On balance, this tilts longer term risks towards bond yields moving higher (and prices falling). It also means that in future central banks will have less leeway to respond aggressively to demand shocks and adverse events in financial markets. Central banks responded to a highly unusual recession – one that was very different in nature to the global financial crisis – with an extraordinary amount of policy stimulus. While this was the right thing to do at the time, there’s pressure to unwind this stimulus as economies recover and inflation pressures start to look more than transitory.

All of this makes us cautious on interest rate risk, in the Tactical Bond fund duration is very close to zero.

The interest rate outlook – what could it mean for bond investors?

It’s widely expected that interest rates will rise from their historic lows of 0.1% at some point. But it will likely be a number of small rises instead of one big one. The Bank of England dropped rates to this level to offer some emergency support to the economy in the face of the pandemic. So as we emerge from it, it’s normal to expect that interest rates should come back to a more normal level over time.

Central banks do have to be careful though. Raising rates more quickly than currently expected risks stalling the recovery and raising borrowing costs for governments with already ballooning budget deficits.

Bond fund managers have a range of different views on if rates will rise and if so, how quickly. This means fixed income funds will be positioned differently depending on what the manager thinks will happen. We think it’s good to be aware of the duration of your bond investments and consider if they align with your investment objectives and how much risk you’re happy taking.

You can find the duration for individual bonds on the factsheet. You’ll be able to find the duration for most funds, but not all, on their individual factsheets too.

But it's also important to remember that duration is only one of many factors that could affect the price of your bond or bond fund. For example, duration doesn’t tell you anything about the credit quality of a bond or bond strategy.

While the outlook for bond returns might not in our view be as bright as it has been in the past, they shouldn’t necessarily be cast aside and they can still play an important role in diversifying a portfolio.

For a more detailed look at what could be next for bonds, read our most recent bond sector review.

If you want fixed income fund ideas, have a look at our Wealth Shortlist.

This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. All investments and any income they produce can fall as well as rise in value, so you could get back less than you invest.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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