Not just about duration: the benefits of a multi-factor approach to fixed income

Duration is a key consideration for bond investors; but it’s far from the whole story, argues James McAlevey, Aviva Investors’ Portfolio Manager, AIMS Fixed Income and Target Return funds.​

All too often, we hear that fixed income investing is ‘all about duration’. Duration – the sensitivity of an asset’s price to movements in interest rates – is certainly an important consideration for anyone investing in the bond markets. But it’s far from being the whole story.

This is a crucial concept for fixed-income investors – especially at a time when duration risks are heightened. In recent years, investors’ appetite for long-dated bonds has driven the overall duration, and subsequent supply, of the bond market to record levels. So, now that the US Federal Reserve has embarked on a rate-hiking cycle and other central banks are retreating from the extraordinary monetary stimulus of the past decade, it’s easy to focus exclusively on the risks posed by rising interest rates. But the bond market is a vast and varied place. It has a multi-factor opportunity set, not just those that hinge on the direction of central-bank policy and thus interest rates.

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