With the size of the rise in yields we have seen in the past 18 months, this effect can be significant. For instance, a major UK corporate bond index has seen its duration fall by nearly 2.5 years over this time.
This makes a significant difference. Barring the yield spikes of September 2022, June marked the first time in a decade that the yield on the ICE Bank of America Sterling Corporate Bond Index exceeded its duration. This means investors are now being paid more yield for taking on less interest rate risk.
Looking 12 months out, an investor could expect yields to rise a further 100 basis points and still expect to make a positive return on their position, all else equal.
After the pain suffered in 2022, bond markets now offer a number of interesting opportunities — and no doubt some potential pitfalls as well.
Bond volatility will probably remain elevated if economic data continues to surprise on the upside. But with yields at levels not seen in more than a decade, you are once again being paid to take the risk.
Stuart Chilvers is a strategic bond fund manager at Rathbones
