Bond market note
Would today be a good day to be holding bonds that have lower or higher duration? I am not familiar with the duration concept too much but from what I can interpret, it is better to hold higher duration bonds because that means YTM is low and TTM is very high. Can someone please explain this better?
All else being equal, the short answer is that you want to be longer duration (relative to your benchmark) when rates are going down and shorter in duration (relative to your benchmark) when rates are going up.
This is an oversimplification depending on what you're holding (Treasuries, high quality corporates, high yield, etc) as not all bonds behave in the same manner depending on why rates are moving and can experience spread tightening/widening as well. Additionally, macro economic conditions can suggest differing duration positioning over longer horizons regardless of rate movements in the short term.
Preface: I'm no bond expert.
There are a few different types of duration and different ways to think about them.
Macaulay Duration: To many this is duration in its simplest sense. Think of it as the number of years it takes for a given price of a bond to be repaid by its cash flows. Zero coupon bonds will have duration equal to its TTM and vanilla bonds will have have duration close to but less than its TTM. Ceteris paribus, longer dated bonds will have higher duration because the fat principal payment is further out. If you're a visual learner, think of duration as the fulcrum on a balanced scale of cash flows.
Modified Duration: This shows duration sensitivity to changes in yield. It's equal to MacD/1+[YTM/periods per year] and thus always less than MacD Translation: Given a 1% change in interest rates, the bond price will change by [Modified Duration]%
DV01 - Dollar Duration: Think of this as the "delta" of your bond. Given a 1bp change in interest rates, bond prices will change by $DV01. This works beautifully with convexity, which can be thought of as the "gamma" of bonds.
It depends...
...mostly on what these bonds are. Big difference between holding a UST and Greek gov't bond today; I'm assuming the question what in relation to Brexit impact.
I like how the two posters above you answered without even asking that fundamental question.
The second part of my response can be summed up as "it depends." No?
That's fair; you're probably just much more earnest than me in replying to such an oversimplified question.
I ignored the first half of his question and just gave him more information on duration in general
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