Putnam Fixed Income Team

Beware interest-rate risk in bond portfolios

Putnam Fixed Income Team

There is little question that interest rates would be significantly higher in the absence of Fed purchases.

It is important to understand how potentially damaging a long-duration strategy could be in this environment.

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The duration, or sensitivity to rate movements, of a 10-year Treasury bond is about nine years, which means that an increase in rates of just 100 basis points would result in an approximate 9% drop in the value of that bond.

For investors purchasing bonds outright who are willing to hold their positions until maturity, that may not be a concern. But investors with broadly diversified portfolios who need even a moderate degree of liquidity should be mindful of their duration exposure in this environment.