Hello guys,
I know that duration is defined as how sensible the NPV of a cash flow is in relation to a variation in the discount rate.
Having said that, is there any situation where a long duration for an investment is desirable? When should one desire a short duration/long duration?
Thanks in advance.
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Choosing the right short-duration strategy or fund requires you to understand how duration and credit quality might play out in different market conditions. When compared with long-duration bond funds, short-duration choices generally indicate less sensitivity to rising rates and, all else being equal, usually lower yields. These differences in rate sensitivity and yield can also occur within the range of short-duration products on the market.
You want long duration bonds when you think interest rates will fall.
It's important to take a look at the yield curve and determine your expectation on where interest rates are going to go. For example, in anticipation of the government raising interest rates, a lot of funds decided to be short in duration. But there is a trade off as shorter maturities have less yield.
On another note, I think convexity is fairly important. It's the second derivative which determines the magnitude on how much your duration changes as rates rise/fall. Higher coupons typically have less convexity compared to their counterparts.
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