What is the Duration of Your Bond Portfolio? And Why?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
SpaceCowboy
Posts: 887
Joined: Sun Aug 12, 2012 12:35 am

Re: What is the Duration of Your Bond Portfolio? And Why?

Post by SpaceCowboy » Sat Jul 04, 2015 1:14 am

Well this thread got me to actually analyze my fixed income holdings on a spreadsheet, so I really appreciate the topic being brought up.
I'm a recent early retiree and have been increasing my commitment to fixed income over the last several years. Currently I'm 60/40 equity/fixed and heading to 50/50.
My FI portfolio is split roughly 50/50 between bond funds and stable value products (CDs, Ibonds, stable value funds, cash)

On the bond funds, avg. SEC yield is 2.79% with a avg. duration of 5.39 years. Approximately 20% of this is allocated to inflation linked products

On the stable value side, avg. yield is 2.14% with arguably 0 duration, depending on how you view CDs and Ibonds under 5 yrs. old. The CDs account for approximately 65% with avg. yield of 2.41% and 3.61 avg. time to maturity.

Not quite sure how or why I ended up here, except that I've consciously shifted towards the stable value portion starting with the PenFed 3% 5 year CD deal of 2014. This also does not include my kids fully funded 529s, where 55% is allocated to Colorado's SVP at 3.09%, which I think is the best FI deal going right now that is accessible to virtually anyone.

User avatar
Kevin M
Posts: 10884
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: What is the Duration of Your Bond Portfolio? And Why?

Post by Kevin M » Sat Jul 04, 2015 2:47 pm

grabiner wrote: I Bonds are zero-coupon bonds with a duration equal to the time you will hold them.
<snip>
Even if an I-Bond is at the market rate, it may still have a duration equal to its maturity, because you are maxing out your I-Bond purchases and can't replace the bond if rates rise.
<snip>
Conversely, an I-Bond has a zero duration if you can replace it freely.
David, this is an interesting perspective. However, even if maxing out my annual I Bond purchases, I still think of I Bonds as having zero duration in terms of price sensitivity to interest rates (but with slight downside potential during first five years due to small early withdrawal penalty, similar to a direct CD). If rates increase enough to justify it, I can sell my I Bonds with no loss of principal, and buy something else, like a TIPS. So although the present value may fall if rates increase, the liquidation value does not.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
#Cruncher
Posts: 2804
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: What is the Duration of Your Bond Portfolio? And Why?

Post by #Cruncher » Sat Jul 04, 2015 11:02 pm

The only way I can think you arrive at this figure, Alex, is to define "duration" for a TIPS as the change in price corresponding to a 1% point change in yield of a nominal Treasury security of the same maturity. For example, assume a 1% point change in the yield of a 10-year TIPS causes a 9.5% change in its price. If one also assumes that TIPS' yields change by half the amount of changes in yields for nominal Treasuries of comparable maturities, then a 1% point change in nominal yields would "cause" a 4.75% change in the price of a TIPS.

But this definition is worthless, in my opinion, because there is no fixed relation between TIPS yields and nominal Treasury yields. In fact they often move in the opposite direction. The only useful way, I believe, to define (modified) duration for a TIPS is the same as for any other bond: namely the price sensitivity to a change in yield of the security itself.
alex_686 in [url=https://www.bogleheads.org/forum/viewtopic.php?p=2542780#p2542780]this post[/url] wrote:... There is Macaulay duration and modified duration. ... It is modified duration that tells one how sensitive the bond is to interest rate changes. For most bonds they are about the same. However, because of how TIPS receive cash flows there is a huge difference.
There is no huge difference, Alex. As grabiner says in this post, Modified duration for a TIPS differs little from its Macaulay duration, as it does for any nominal Treasury bond or note.

I'm not sure what you mean by "how TIPS receive cash flows". Maybe you're referring to the fact that TIPS of the same maturity and issued at about the same time have smaller coupons than nominal Treasuries. And the smaller the coupon, the smaller the difference between maturity and duration. This is true of TIPS just as it is of nominal bonds. For example, here is a comparison of three bonds maturing in just under ten years.
  • (Column B) 2% coupon nominal Treasury issued in 2015
  • (Column C) 2.375% coupon TIPS first issued in 2004
  • (Column D) 0.25% coupon TIPS issued in 2015
Yields are from WSJ Quotes 7/2/2015 for nominal Treasuries and TIPS. Duration calculated with the Excel DURATION and MDURATION functions. Formulas in cells B5:B7 are written so they can be copied right.

Code: Select all

Row    Col A              Col B       Col C       Col D         Formulas in column B
---  ----------         ----------  ----------  ----------   -------------------------
  1  Settlement         07/06/2015			
  2  Maturity           02/15/2025  01/15/2025  01/15/2025	
  3  Coupon                 2.000%      2.375%      0.250%	
  4  Yield                  2.391%      0.483%      0.454%	
  5  Years until Maturity   9.62        9.53        9.53     =(B2 - $B1) / 365.25
  6  Macaulay Duration      8.70        8.59        9.41     =DURATION( $B1, B2, B3, B4, 2, 1)
  7  Modified Duration      8.60        8.57        9.38     =MDURATION($B1, B2, B3, B4, 2, 1)
For the first two bonds, the Macaulay duration is about 0.9 less than the maturity. This is because they both have about the same size coupons (2% & 2.375%). But the third bond has a Macaulay duration only about 0.1 less than the maturity. This is because it has a much smaller coupon (0.25%) than the other two. But for all three bonds, the Modified Duration is only slightly less than the Macaulay duration. The size of the coupon and whether the bond is nominal or inflation-protected has little effect. [ 1 ]

And, yes, it is the Modified Duration that indicates "how sensitive the bond is to interest rate changes". This is illustrated here for a 0.01% point change in yield applying the Excel PRICE function on the 0.25% coupon TIPS:

Code: Select all

98.100   =PRICE(DATE(2015, 7, 6), DATE(2025, 1, 15), 0.25%, 0.454%, 100, 2, 1)
98.008   =PRICE(DATE(2015, 7, 6), DATE(2025, 1, 15), 0.25%, 0.464%, 100, 2, 1)
-0.0938% =98.008 / 98.100 - 1 = 9.38 X -0.01%
This confirms the validity of calculating Modified Duration for a TIPS the same way as for any other Treasury Note or Bond.

Concerning the original post ... Thanks, Simplegift for prodding me to calculate the durations of my bond holdings. In a 40:60 stock:cash&bond allocation:

Code: Select all

                                        Modified
                             Maturity   Duration
                             --------   --------
Cash (incl I Bonds)   12%        -          -    [ 2 ]
TIPS                  39%       6.6        6.0
Nominal taxable       16%       8.4        6.2
Tax exempt            33%      12.9        5.2
                     ----      ----        ---
Total / Wtd Avg      100%       8.2        5.0
The average of 5.0 is less than I would have guessed beforehand. But that's probably just as well since my tax exempt holdings include a couple of long term Vanguard funds whose prices would probably fall more than indicated by their average durations -- because of reduced call likelihood -- should interest rates rise. (This is implied by duration being so much less than average maturity for the tax exempt category.)

I'm happy with this duration because I've read that over time medium term bonds return more than short term and as much as long term. I'll keep approximately this duration as long as interest rates stay the same or fall. But if they were to rise significantly (say 1.5% points), I'd probably extend the average duration to about 10. This is because I anticipate about 20 years of retirement and would be glad to lock in yields that would be sufficient for my needs. Plus since I've been waiting several years for interest rates to get back to "historical levels", I'd feel miserable if I were to increase duration now, and then have them rise significantly. :(
  1. What little difference there is between Macaulay (MacDur) and Modified duration (ModDur) is actually less for TIPS than for nominal Treasuries of the same maturity. (This is the reverse of alex_686's contention.) This is because of TIPS' smaller yields. It can be seen from the following formula for deriving ModDur from MacDur (see here on Wikipedia):

    Code: Select all

    ModDur = MacDur / (1 + Yield   / 2)
      8.60 = 8.70   / (1 + 0.02391 / 2)  <-- nominal Treasury with 2.391% yield
      8.57 = 8.59   / (1 + 0.00483 / 2)  <-- TIPS with 0.483% yield
  2. I'm showing my I Bonds with zero duration in spite of the intriguing post by grabiner. I don't have many and none with a fixed rate greater than 1.2%; and I just find it simpler to treat them as an (inflation-indexed) savings account.
Edited 7/6/2015 to add footnote # 1
Last edited by #Cruncher on Mon Jul 06, 2015 7:44 am, edited 1 time in total.

HurdyGurdy
Posts: 1174
Joined: Wed May 09, 2012 10:21 pm

Re: What is the Duration of Your Bond Portfolio? And Why?

Post by HurdyGurdy » Sun Jul 05, 2015 1:16 am

Very good question.

How would you estimate the duration of a TIAA-CREF Traditional account?

If it is 0, I guess I could get some long-term gov bond funds and reach for yield while maintaining a ~5 year duration.

However, some money inside Traditional must be in bonds with a non-zero duration; the account is somewhat affected by changes in interest rates.

trueblueky
Posts: 1513
Joined: Tue May 27, 2014 3:50 pm

Re: What is the Duration of Your Bond Portfolio? And Why?

Post by trueblueky » Sun Jul 05, 2015 9:39 am

grabiner wrote:
trueblueky wrote:So I Bonds and G Fund don't exactly have duration. How do I fit those into the computation?
The G fund has zero duration, as its bonds mature daily. If Treasury yields rise by 1%, the G fund loses nothing, and its yield rises by 1%.

I Bonds are zero-coupon bonds with a duration equal to the time you will hold them. Often, the time will be fixed, particularly because the older I-Bonds are at well above market yields. If you have a I-Bond with a 2% yield which is 20 years from maturity and which has a current value of $10,000, it will be worth $14,859 in today's dollars at maturity. If current yields on I-Bonds are 0%, your I-bond has a present value of $14,859, as that is what you would have to pay to get the same value from a new bonds. Now, if I-Bond rates rise to 0.1%, the present value of your I-Bond drops to $14,565, a 2% loss. You still won't buy a new bond, so you have taken the 2% loss, which corresponds to a 20-year duration.

Even if an I-Bond is at the market rate, it may still have a duration equal to its maturity, because you are maxing out your I-Bond purchases and can't replace the bond if rates rise. For example, if you have an I-Bond with a zero yield with 30 years to maturity worth $10,000, and rates rise to 0.1%, you could get the same return by selling your old I-Bond and buying a new one for $9705. However, you aren't allowed to do this because you have already bought the $10,000 maximum for this year, and you may be unable to replace it next year either because you were already planning to buy $10,000 then.

Conversely, an I-Bond has a zero duration if you can replace it freely. If you bought an I-Bond last year, and don't need to buy any I-Bonds this year because you can make all your investments in your IRA and 401(k), then if rates rise, you can sell last year's bond (paying the small penalty and possibly a tax bill), and buy this year's bond for a higher yield.
With G Fund having 0 duration (underlying treasuries have a weighted average maturity of 11 years, for what it's worth), CDs having 0 duration, I Bonds having 0 duration, and F Fund having 5.07 years duration, my overall duration is under one year. If not for G, I suppose I should add some long bonds.

kolea
Posts: 1322
Joined: Fri Jul 11, 2014 5:30 pm
Location: Maui and Columbia River Gorge

Re: What is the Duration of Your Bond Portfolio? And Why?

Post by kolea » Sun Jul 05, 2015 9:45 am

Average duration target = 5 years.

One thing to be careful of with bond funds is the distribution of maturities. A fund can have an average of 5 years by combining short and long bonds, or by investing mostly/entirely in intermediates. I did not want any long bonds, so sought out funds that were truly intermediate bonds.
Kolea (pron. ko-lay-uh). Golden plover.

User avatar
Dale_G
Posts: 3220
Joined: Tue Feb 20, 2007 5:43 pm
Location: Central Florida - on the grown up side of 82

Re: What is the Duration of Your Bond Portfolio? And Why?

Post by Dale_G » Sun Jul 05, 2015 4:11 pm

Weighted duration = 6.43 years. I am 70% equities and 30% bonds. Of the bonds, 20% is in high yield and emerging markets funds. The rest is about evenly divided between treasuries and corporates with some muni's tossed in. I agree that CD's are good for a portion of the bond allocation, but even there the return is a pittance.

In my book, bonds are for income. "Safety" is not the reason I own them. If I were a young pup - say 50 or 60 (knowing what I know now) I would push the duration out longer.

Dale
Volatility is my friend

letsgobobby
Posts: 12114
Joined: Fri Sep 18, 2009 1:10 am

Re: What is the Duration of Your Bond Portfolio? And Why?

Post by letsgobobby » Sun Jul 05, 2015 4:25 pm

Is it important that I know the duration of my bond fund?

Our fixed income is roughly 45% TBM, 45% stable value fund, 10% I bonds, a smattering of Vanguard intermediate muni fund (VWITX), a dribble of a local muni bond issuance which is redeemable in 10 years and not liquid. We continue to buy stable value fund, I bonds, EE bonds, and VWITX with all new money, and if 10 year treasuries get closer to 3% we'll probably buy more TBM as well.

I barely pretend I can predict stocks. I won't even pretend to be able to predict bonds.

User avatar
siamond
Posts: 4806
Joined: Mon May 28, 2012 5:50 am

Re: What is the Duration of Your Bond Portfolio? And Why?

Post by siamond » Sun Jul 05, 2015 4:43 pm

If there is one thing I believe in, this is diversification... Can't do any better than a total-bond fund in my humble opinion... So I really do not care about the duration of my bond portfolio.

User avatar
abuss368
Posts: 14071
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: What is the Duration of Your Bond Portfolio? And Why?

Post by abuss368 » Mon Jul 06, 2015 9:34 pm

Total Bond and Intermediate Tax Exempt.

What about the Vanguard one two punch in terms of bond funds? Total Bond & Total International Bond. That is a huge amount of diversification.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

lack_ey
Posts: 6692
Joined: Wed Nov 19, 2014 11:55 pm

Re: What is the Duration of Your Bond Portfolio? And Why?

Post by lack_ey » Mon Jul 06, 2015 10:01 pm

The thing with bonds is that there's not much evidence that you actually need diversification. If all you used for bonds was 10-year Treasuries, you'd have done pretty well the last several decades, pretty much the same as a total bond approach over the last few. Now, there's some question these days as to whether or not Treasuries are actually "riskless" in the credit risk sense, but it's hard to imagine Treasuries truly tanking and corporate and other bonds holding up.

There's not that much theoretical justification to suppose that the market portfolio of bonds is necessarily the best option for your needs or even optimal in the sense that some suppose market cap weighting equities is.

So I would not necessarily blindly take total bond. On the other hand, whatever most people do in fixed income doesn't seem to matter all that much in the long run, and justifying something else as better is difficult. And for a practical matter, total bond funds are cheap.

User avatar
avenger
Posts: 779
Joined: Mon Dec 02, 2013 12:11 pm

Re: What is the Duration of Your Bond Portfolio? And Why?

Post by avenger » Sat Jul 11, 2015 12:41 pm

I'm essentially 50/50 total bond market/SV fund (a little total international bond but negligible). I usually count my pension contributions toward FI (1/3 of total FI) but I won't for purposes of this post. Total bond is 5.7 years. I say SV fund is 0 years. Average of that is 2.85 years.

No rhyme or reason, other than to keep bonds/SV 50/50.
cheers ... -Mark | "Our life is frittered away with detail. Simplify. Simplify." -Henry David Thoreau | [3 fund portfolio: VTI, VXUS, SV fund (yield 3.01%)]

bck63
Posts: 442
Joined: Fri Sep 28, 2018 4:59 pm

Re: What is the Duration of Your Bond Portfolio? And Why?

Post by bck63 » Tue Mar 26, 2019 8:30 pm

lack_ey wrote:
Thu Jul 02, 2015 1:15 pm
I'm at about 3.5 years effective duration, including my cash allocation, which is deliberately thought of as part of the whole, counting cash as zero-duration fixed income.
Hi lack_ey. I'm reading some old posts about bond duration, and I came across the above, which is very helpful. Can you tell me how to calculate average duration using one's cash allocation?

Also, do you know if there is a difference between "average stated maturity" and "weighted average maturity"?

Thanks in advance for any insights you can offer.

Big Dog
Posts: 1205
Joined: Mon Sep 07, 2015 4:12 pm

Re: What is the Duration of Your Bond Portfolio? And Why?

Post by Big Dog » Tue Mar 26, 2019 8:36 pm

I all-in with Total Bond, and whatever that duration is (I really have no idea), is what I have.

User avatar
vineviz
Posts: 4420
Joined: Tue May 15, 2018 1:55 pm

Re: What is the Duration of Your Bond Portfolio? And Why?

Post by vineviz » Tue Mar 26, 2019 8:44 pm

bck63 wrote:
Tue Mar 26, 2019 8:30 pm
Hi lack_ey. I'm reading some old posts about bond duration, and I came across the above, which is very helpful. Can you tell me how to calculate average duration using one's cash allocation?
I'm not lack_ey, but cash has a duration of 0.00.

So if you were 50% cash and 50% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) then your duration would be (.5 x 0 years) + (.5 x 6 years), which equals 3 years.
bck63 wrote:
Tue Mar 26, 2019 8:30 pm
Also, do you know if there is a difference between "average stated maturity" and "weighted average maturity"?
Most sources would calculate those numbers in the same way. I've never seen a source quote both, so I'm confident most people use them interchangeably.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

bck63
Posts: 442
Joined: Fri Sep 28, 2018 4:59 pm

Re: What is the Duration of Your Bond Portfolio? And Why?

Post by bck63 » Tue Mar 26, 2019 8:50 pm

vineviz wrote:
Tue Mar 26, 2019 8:44 pm
bck63 wrote:
Tue Mar 26, 2019 8:30 pm
Hi lack_ey. I'm reading some old posts about bond duration, and I came across the above, which is very helpful. Can you tell me how to calculate average duration using one's cash allocation?
I'm not lack_ey, but cash has a duration of 0.00.

So if you were 50% cash and 50% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) then your duration would be (.5 x 0 years) + (.5 x 6 years), which equals 3 years.
bck63 wrote:
Tue Mar 26, 2019 8:30 pm
Also, do you know if there is a difference between "average stated maturity" and "weighted average maturity"?
Most sources would calculate those numbers in the same way. I've never seen a source quote both, so I'm confident most people use them interchangeably.
Thanks vineviz! You've been very helpful with several of my questions over the last couple of weeks.

yeahman
Posts: 190
Joined: Thu Mar 02, 2017 11:27 am

Re: What is the Duration of Your Bond Portfolio? And Why?

Post by yeahman » Tue Mar 26, 2019 9:02 pm

I'm a beginner bond investor. Why wouldn't I want a very long duration if I intend to hold it for at least as long?

User avatar
vineviz
Posts: 4420
Joined: Tue May 15, 2018 1:55 pm

Re: What is the Duration of Your Bond Portfolio? And Why?

Post by vineviz » Tue Mar 26, 2019 9:28 pm

yeahman wrote:
Tue Mar 26, 2019 9:02 pm
I'm a beginner bond investor. Why wouldn't I want a very long duration if I intend to hold it for at least as long?
Yes, that's the general rule. Your interest rate risk is minimized by matching the duration of your bonds with the time horizon you are investing for.

My average bond duration is about 17.6 years.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

columbia
Posts: 1653
Joined: Tue Aug 27, 2013 5:30 am

Re: What is the Duration of Your Bond Portfolio? And Why?

Post by columbia » Wed Mar 27, 2019 6:10 am

Short term treasuries.

I’ll let others take the longer duration and credit risks.

pascalwager
Posts: 1477
Joined: Mon Oct 31, 2011 8:36 pm

Re: What is the Duration of Your Bond Portfolio? And Why?

Post by pascalwager » Wed Mar 27, 2019 11:32 pm

columbia wrote:
Wed Mar 27, 2019 6:10 am
Short term treasuries.

I’ll let others take the longer duration and credit risks.
I'm similar: 100% money market. If the yield spread improves, then I'll go back to STT.

In one account I don't have access to STT, so I would barbell 30% TBM and 70% money market to simulate STT.

yogesh
Posts: 321
Joined: Thu Oct 11, 2012 6:20 pm

Re: What is the Duration of Your Bond Portfolio? And Why?

Post by yogesh » Wed Mar 27, 2019 11:55 pm

That’s market timing on bond side :-)

I am intermediate term taxable and tax-exempt.
Emergency: FDIC | Taxable: VTMFX | Retirement: TR2040

pascalwager
Posts: 1477
Joined: Mon Oct 31, 2011 8:36 pm

Re: What is the Duration of Your Bond Portfolio? And Why?

Post by pascalwager » Thu Mar 28, 2019 1:15 am

yogesh wrote:
Wed Mar 27, 2019 11:55 pm
That’s market timing on bond side :-)

I am intermediate term taxable and tax-exempt.
I look at it as accepting the best offer. MM made me a better yield offer than STT after considering the interest rate risk difference. DFA basically does this in adjusting the maturity of their short-term funds.

Intermediate fluctuates too much for my temperament. I've tried a few times and just threw in the towel.

Post Reply