Steve Wagner: Steve Wagner, I'm a Senior Portfolio Manager and Senior Analyst at Federated Hermes.
Interviewer: Why should investors consider shorter duration investment options in the current market environment?
Steve Wagner: Clearly we've had some rate pressure, over the last few months. We've seen the five year US treasury has ticked up by about 60 basis points and we've seen the tenure US treasury has ticked up by a little over 40 basis points. So, clearly we are seeing, some rate pressure flowing through the system right now with concerns about increasing inflation. Now, if we take a step back and think about what duration means for the investor. Duration as a concept simply putnis the overall bond prices sensitivity to the general movement in market rates. So, for instance, if you have a bond and you keep all else equal, if that bond has an eight year duration, in terms of years, that bond will be twice as sensitive to rate movements as a bond that has four years of duration.
Steve Wagner: So, if rates move higher by a hundred basis points, the bond that has eight years, in duration will be twice as reactive in a negative fashion relative to the bond with four years in duration. So, clearly there's concerns about rising rates, investors do want to take a look at short duration options at this point in time. One the example to point, out is if you look I've mentioned over the last few months, we have seen some, a rate rate pressure. And if you take a look at the Barclays aggregate bond index, which is a broad measure of bonds across a universe, longer duration, you have seen some negative returns over the last few months. It's not to say that will always be the case, but that is directly attributable to some of the higher rates that we've been seeing. So, it does make sense to limit duration of the portfolio, and we truly think that that has a longer term potential to stay in a portfolio, to create some ballast for the income investor in the portfolio.
Disclosures: Views are as of Nov. 16, 2021 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices. Duration is a measure of a security price sensitivity to changes in interest rates. Securities with longer durations are more sensitive to changes in interest rates than securities of shorter durations. Federated Investment Counseling 21-40580 (12/21)