Duration

Duration measures how sensitive a bond or bond fund is to changes in interest rates. As a practical approximation, a bond with a duration of 8 years will lose about 8% of its value if interest rates rise by one percentage point, and gain about 8% if rates fall by one point. It is the single most important number for understanding bond risk, and it is distinct from a bond's maturity — though longer-maturity bonds generally have longer duration.

The inverse relationship between bond prices and rates is the core idea: when new bonds are issued at higher yields, existing bonds paying lower coupons become less attractive and their prices fall until their yields are competitive. The longer a bond's duration, the more dramatic that repricing. This is why a long-term Treasury fund like TLT can swing violently — it carries very long duration — while a short-term Treasury fund barely moves.

Duration explains many outcomes that puzzle new investors. It is why long bonds fell more than 30% in 2022 as rates spiked, and why the same long bonds can rally powerfully in a flight-to-safety when rates collapse. It is also why TIPS can lose money during inflation: their duration exposes them to rising real rates even as their inflation adjustment helps.

In asset allocation, duration is a lever. Long-duration bonds provide the most powerful diversification against a stock-market crash, because they tend to rally hardest when investors flee to safety — which is why strategies like the Permanent Portfolio and All Weather deliberately hold them. Shorter-duration bonds sacrifice some of that crash protection for far less volatility. Choosing where to sit on the duration spectrum is really a choice about how much interest-rate risk you want your ballast to carry.