Manusha Samaraweera

January 10, 2025

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. However, during the post-GFC period¹, the merits of holding duration were less clear; duration became a source of only modest yield, while its ability to be a diversifier was also impaired. 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.

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.

During good times: In stable markets, we think duration should once again be a valuable contributor to income alongside credit exposure.

The attractiveness of duration over time

Past results are not a guarantee of future results.
Data as at 30 November 2024. Bloomberg US Corporate Investment Grade Index. Source: Bloomberg

During bad times: When markets turn volatile, we think duration will be a more effective diversifier.

Diversification in action: A Q3 2024 case study

Past results are not a guarantee of future results.
Data as at 30 September 2024, in US dollar terms. Indices: S&P 500 Index and Bloomberg Global Aggregate Corporate Index. Sources: Bloomberg, S&P Global

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.