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Investment insights from Capital Group

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Fixed Income
Duration’s comeback: A better friend for income and credit
Manusha Samaraweera
Fixed income investment director

Before the Global Financial Crisis (GFC), duration – a measure of a bond portfolio’s sensitivity to interest rates – was a steadfast ally for income and credit-focused investors. Entering 2022, the relationship between duration and credit came to a critical juncture, however. As central banks aggressively hiked interest rates to combat inflation, not only did duration contribute to negative returns but this happened at a time when equities and credit were both struggling, exactly when duration’s diversification benefits are supposed to come to the fore.


That said, the good news for duration investors is that bond markets are now better prepared for a higher inflationary environment, as demonstrated by the current gap between the market’s Fed Cash Rate expectations versus the Fed’s own dot plot expectations by the end of 2027. In other words, bond markets should be less sensitive to higher inflationary expectations as they are already pricing in a slower pace for rate cuts than the Fed.


Bond markets brace for higher inflation with improved preparedness

2027 Fed implied cash rate: Market vs Fed projections

Bond markets brace for higher inflation with improved preparedness

Past results are not a guarantee of future results.
Data as at 20 December 2024. Source: Bloomberg. Prior to 18 September, a composite of end 2026 and long-term was used for Fed-dot implied Fed End-2027 Cash Rate. 

We believe a combination of higher yields and a change in the macroeconomic environment means duration can now bring several potential benefits back to bond portfolios. As such, we think it is time for income and credit investors to accept duration back into the friend circle.


While there are merits in actively managing duration, especially when rates are volatile, investors do need to acknowledge two main risks with being overly active: (1) lack of protection when needed, and (2) unnecessary volatility.


Capital Group’s approach to actively managing duration in income and credit portfolios is to:
 

  • Maintain a structural level of duration: Enough to offer diversification during volatile events and enhance yield.
  • Retain modest flexibility: Modestly adjust duration exposure to take advantage of valuations, while ensuring structural exposure is broadly maintained.

By adopting this structural and modestly flexible approach, investors can better navigate the complexities of today's rate environment without compromising the benefits that duration brings to income and credit portfolios.



Manusha Samaraweera is a fixed income investment director at Capital Group. He has 14 years of industry experience and joined Capital Group in 2023. Prior to joining Capital, Manusha worked as a vice president, fixed income and ESG strategist at PIMCO. He holds a double bachelor's degree in finance and law from the University of Sydney, Australia. He also holds the Chartered Financial Analyst® designation. Manusha is based in Singapore. 


Past results are not predictive of results in future periods. It is not possible to invest directly in an index, which is unmanaged. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.

Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.