In a previous insight, we looked at why bond prices and yields move inversely. That explains the direction of travel, but the next question is why some bonds, and some bond funds, move more than others when yields change. That is where ‘duration’ comes in.
Duration is one of the main ways of measuring a bond’s sensitivity to changes in yields. Despite the ordinary meaning of the word, duration is not the same thing as maturity, although it is usually expressed in years and maturity does influence it.
In technical terms, duration (more formally known as Macaulay duration) is the weighted average time it takes to receive a bond’s cash flows. A helpful way to think about this is to go back to the basic nature of a bond: a bond is simply a stream of future cash flows. If more of those cash flows are due far into the future, the bond’s value is generally more sensitive to changes in discount rates. Duration is a way of capturing that sensitivity in a single number.
For example, a three-year bond paying an annual coupon will usually have a duration of slightly less than three years, because the investor receives some cash flows before the final maturity date. A zero-coupon bond, by contrast, has no interim cash flows, so its duration is the same as its maturity.
In practice, investors and fund managers are usually more interested in what is known as ‘modified duration’, because it gives a more direct indication of price sensitivity. In simple terms, modified duration estimates how much the price of a bond or bond fund might change for a 1% change in yields.
That is why duration often appears on bond fund fact sheets. If a bond fund has a modified duration of 6, that suggests its price would fall by roughly 6% if yields rose by 1%, and rise by roughly 6% if yields fell by 1%, all else equal. That is only an approximation rather than a precise forecast, but it is a useful starting point for understanding interest rate risk. The higher the duration, the more sensitive the bond or fund is likely to be to changes in yields.
Longer-dated bonds will usually have higher duration than shorter-dated bonds and they tend to experience larger price movements when yields change. Maturity is not the only factor, though. Coupon also matters: a lower-coupon bond will generally have a higher duration than a higher-coupon bond of the same maturity, because more of its value depends on the final repayment rather than earlier income payments. Yield matters too: lower-yielding bonds tend to have higher duration than otherwise similar higher-yielding bonds. In other words, duration is shaped by the overall pattern and timing of the cash flows, not just by the final maturity date.
For many treasury investors buying individual bonds, duration may not feel especially important on a day-to-day basis. If the intention is to hold a bond to maturity, and the issuer remains creditworthy, interim market price movements may have less practical significance than they do for a traded portfolio, where prices need to be marked to market. However, duration still matters where securities may need to be sold before maturity, where valuations are reported, or where investors need to understand the opportunity cost of locking in a yield.
The position is different for bond funds. A bond fund is continuously marked to market, and its value will move as yields move. Fund managers also make active decisions about duration, whether by positioning shorter or longer than a benchmark or by changing exposure as their interest rate views change. In that context, duration is not just a technical concept, but a practical measure of risk, and one that helps explain why some funds are much more volatile than others when bond markets move.
There is one caveat worth making. Duration is a useful approximation, but it is not perfect. The relationship between bond prices and yields is not a straight line; rather, it is ‘convex’. Convexity helps explain why the actual price movement of a bond may differ from the estimate given by duration alone. That is probably a topic for another day!
The key point is that duration helps explain how much bond prices are likely to move when yields change, so illustrates the relative interest rate risk of holding a bond or bond fund. That makes it one of the most useful measures for understanding interest rate sensitivity.
Arlingclose provides investment and risk management advice, including on direct and pooled fund access to bond markets. If you’d like to learn more about these services, please contact us on info@arlingclose.com.
11/05/2026
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