When Duration Goes Negative
The use of derivatives allows some funds to turn a key measure of interest-rate sensitivity on its head.
Question: I've noticed that some bond funds have negative effective durations [a measure of interest-rate sensitivity]. How is this possible, and does it mean these funds will increase in value if interest rates rise?
Answer: As we've discussed previously in The Short Answer, duration is a metric often used to gauge how a bond or portfolio of bonds will react to changes in interest rates. With so much attention being paid these days to when the Fed will begin raising rates, it's no wonder we've been hearing a lot about duration, as well.
Adam Zoll does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.