Look under the bonnet of bond benchmarks

The most commonly referenced international bond benchmark, the Barclays Global Aggregate Index, is poised to reach seven years - not in age (it has been around a lot longer than that) but rather in duration, being in simple terms the Index’s average weighted term to maturity.

Why should we care about such a milestone? The answer lies in how the Index’s duration has tacked over time and how that affects investment returns, particularly in the current context of historically low (in some cases negative) interest rates.

Know thy duration

Duration gives us a measure of effective bond maturity by taking account of all cashflows, being both coupons and final principal. It is important to investors as it indicates the sensitivity of bond exposure to changes in interest rates. All else being equal, bonds with higher durations have greater price volatility than bonds with lower durations. The longer the duration, the greater the price will fall for a given rise in interest rates and vice versa.