- Traditional fixed income asset classes have been challenged in 2018 as interest rates have seen their first sustained rise in more than a decade. The Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg), a proxy for traditional core fixed income investments, has returned approximately -2.4% YTD as the 10-year U.S. Treasury yield has risen more than 70 bps since January.1
- One reason the Barclays Agg has underperformed this year lies in the fact that its sensitivity to interest rate changes, or duration, has gradually increased over the past decade, from 3.7 years in 2009 to 5.9 years today.1
- As the chart shows, we have seen a similar increase across passive fixed income strategies since 2007.2 In fact, the duration gap between active and passive fixed income strategies is wider today than it has been at any time since 2007.2
- Active managers have been preparing for interest rates to rise for some time, gradually reducing their durations by investing in shorter-term bonds that are less sensitive to rising rates. Meanwhile, the duration profile on passive strategies has risen alongside the underlying assets they track.
- Investors have seen volatility spike in October across both the equity and fixed income markets. Within this environment, now may be a good time for investors to consider actively managing the risks within their portfolios.
1 Bloomberg, as of November 1, 2018.
2 Taxable bond mutual fund data from Morningstar and Bloomberg, via Investment Company Institute and The Wall Street Journal, November 1, 2018. https://on.wsj.com/2RreKHl.
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