19 years maturity, and only a FOUR year duration?

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seugene
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19 years maturity, and only a FOUR year duration?

Post by seugene »

How can a bond fund with such long average maturity (~19 years) have such a short (~4 yrs) duration?

http://www.morningstar.com/funds/XNAS/MKNKX/quote.html

If average coupon payments were super-high, I can see how this can MAYBE happen - but they aren't. Impending call provisions could be another reason, but these are munis, so I do not think that's it. What could it be then?
QBoy
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Re: 19 years maturity, and only a FOUR year duration?

Post by QBoy »

I am not sure, but I would guess it is floating rate notes. For example, if the principal is repaid after 20 years, but the interest rate adjusts ever six months (based on some benchmark), I believe the bond's maturity is long but its duration is short.
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jhfenton
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Re: 19 years maturity, and only a FOUR year duration?

Post by jhfenton »

seugene wrote: Mon Jun 04, 2018 1:11 pm If average coupon payments were super-high, I can see how this can MAYBE happen - but they aren't. Impending call provisions could be another reason, but these are munis, so I do not think that's it. What could it be then?
Looking at the holdings, it is probably largely call provisions. Almost all munis are callable, and if the bonds are likely to be called based on current yields, then duration calculations assume they will be called.

If you look at Vanguard's data for VOHIX (Vanguard Ohio Long-Term Tax Exempt), it has an average maturity of 17.5 years and an average duration of 7.1 years. And a year or two ago, with lower rates that duration was 6.low to 6.mid.
dkturner
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Re: 19 years maturity, and only a FOUR year duration?

Post by dkturner »

seugene wrote: Mon Jun 04, 2018 1:11 pm How can a bond fund with such long average maturity (~19 years) have such a short (~4 yrs) duration?

http://www.morningstar.com/funds/XNAS/MKNKX/quote.html

If average coupon payments were super-high, I can see how this can MAYBE happen - but they aren't. Impending call provisions could be another reason, but these are munis, so I do not think that's it. What could it be then?
Could contain a lot of high coupon bonds with favorable call provisions.
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seugene
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Re: 19 years maturity, and only a FOUR year duration?

Post by seugene »

I just called BlackRock, whose mutual fund my question was about. They told me something interesting. They said they do buy long term bonds, but to bring effective duration much shorter, they also short Treasury futures. Pretty interesting strategy.
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