1. What Is Duration?
Duration is measured in years and represents the price sensitivity of a bond to rate changes. Formula:
Modified Duration = Macaulay Duration / (1 + Yield)
Price Change (%) ≈ -Duration × Change in Yield
Example
A 10-year Treasury paying a 4% coupon has a modified duration of about 8. If yields rise from 4% to 5%, its price falls by roughly 8%. If yields fall from 4% to 3%, it rises by roughly 8% (slightly more, because of convexity, below).
Duration ≠ Maturity
A 30-year bond paying a 5% coupon has a duration of about 16 years, not 30. Coupon payments arrive before maturity, lowering the weighted average time to cash flows.
2. The 2022 Lesson
After more than a decade of very low rates, many portfolios held more duration risk than their owners realised. When yields rose sharply in 2022 (the 10-year Treasury went from about 1.5% to above 4%), long-duration assets fell hard. Total returns for 2022:
20+ Year Treasuries
-30%
A well-known fund of unprofitable growth stocks
-67%
REITs
-25%
Lesson: duration risk can hide in many places at once. When rates move sharply, everything valued off government bond yields reprices at the same time, which is why shares and bonds fell together in 2022.
3. Duration Across Asset Classes
Bonds
Direct exposure. Long-term bonds (20Y+) have 15-20 duration. Short-term bonds (2Y) have ~2 duration.
Rule: Rising rates = bond prices fall. Always.
Growth Stocks
Companies valued at high multiples of today's earnings behave as if they have long durations, because most of their value depends on profits many years away.
Rule: Higher discount rate = lower present value of future earnings.
REITs
Real estate investment trusts rely on borrowing and steady rental income, so higher rates raise their costs and make their income look less attractive next to bonds.
Pattern: REITs have often traded like long bonds when rates move quickly.
Value Stocks
Banks, energy and industrial companies tend to earn more of their value in cash today, so they are less sensitive to rate moves.
Pattern: value shares have tended to beat growth shares when rates rise, as in 2022.
4. When Duration Has Hurt, and When It Has Helped
When Duration Hurts
- Fed hiking cycle: Yields rising = long-dated bonds fall the most; short-term bonds (1-3Y) are far less affected.
- Inflation accelerating: investors demand higher yields to compensate, so long-dated bonds lose most.
- QT (Quantitative Tightening): Fed shrinking its bond holdings = upward pressure on yields.
- Yield curve steepening: Long-end yields rising faster than short-end.
When Duration Helps
- Fed cutting cycle: Yields falling = long-dated bonds (10Y+) rise the most.
- Recession fears: Flight to safety = lower yields across the curve.
- Disinflation: lower inflation expectations pull yields down, lifting bond prices.
- Yield curve inversion: Short rates above long rates = recession signal; long-dated bonds have often rallied afterwards.
5. Advanced Concepts
Convexity
Duration is a linear approximation. Convexity measures how duration changes as yields move. Positive convexity = bond gains more when yields fall than it loses when yields rise. Treasury bonds have positive convexity; mortgage-backed securities can have negative convexity.
Key Rate Duration
Instead of one duration number, measure sensitivity to specific maturities (2Y, 5Y, 10Y, 30Y). Useful for understanding what happens when 2-year and 30-year yields move by different amounts.
Dollar Duration
Duration × Portfolio Value = dollar loss per 1% yield move. Example: $1M portfolio with 7 duration loses $70,000 if yields rise 1%. Critical for risk budgeting.
Bottom Line
Duration is one of the most useful ideas in finance: one number that tells you how much an investment's value depends on interest rates. It is not just about bonds: growth shares, property and any asset valued on distant cash flows carry it too.
The pattern: Professionals track the total duration of a portfolio, not just of its bonds. When the Fed is hiking or yields are rising, short-duration assets (value stocks, floating-rate debt, cash) have historically held up better. When the Fed is cutting or a recession looms, long-duration assets (long bonds, growth stocks) have tended to gain most.
Related
Educational content only. It describes how markets have behaved in the past and is not investment advice.