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Looking at Duration Doesn't Tell the Whole Story

Mind the yield curve.

Bond investors have reaped the benefits of attractive supply-and-demand dynamics, narrowing spreads, and low default rates since the credit crunch of 2008. Whether the decades-long bull market will soon come to an end is up for debate, but what isn't is that rising interest rates can wreak havoc on a bond portfolio's total return.

The inverse relationship between bond prices and interest rates is a central tenet of bond mathematics. As rates rise, new, higher-coupon bonds become more attractive than previously issued lower-coupon bonds. In order to get investors to buy those lower-coupon bonds, prices must fall. Eventually, higher bond yields will be good for investors, but the short-term pain can take investors by surprise.

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