The Danger of Duration with a Monetary Policy Change

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September 20, 2013

"The Great Monetary Experiment", the Federal Reserve's zero rate policy, may be coming to an end. But many investors may be being lulled into a potential false sense of security that rising rates are a long way off. The Fed not only expects the yield curve to steepen, but may in fact encourage it. This could be a wakeup call.
Investors need to be aware of the potential consequences to their fixed income investments as this paradigm shift takes place. We explore the math of duration, which is particularly dangerous in this historically low yield environment. However, not all duration is bad.
Indeed, spread duration has the ability not only to help cushion the loss but also provide strong and positive excess returns in a rising yield-curve and interest-rate environment.


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