You will be able to use duration to estimate how much a bond holding falls when yields rise.
Marcus's risk numbers so far all describe his portfolio as one blob. Volatility, drawdown and beta tell him how the whole thing has behaved. None of them tells him what happens to his S$30,000 SGD bond fund if interest rates jump next month. For that, bond investors use a number of their own, and it's the one figure on a bond fund factsheet worth reading before any other.
You met duration in Bonds, T-bills, SSBs and fixed deposits, lesson 2.3, Duration: how far a price moves when rates move. The working version is this: duration is roughly the percentage fall in price for a one percentage point rise in yields, and the percentage rise for a one point fall. That lesson explained why longer maturities and lower coupons raise it. This one uses it the way a risk desk does, as an input you can add up across holdings and turn into dollars.
Marcus's bond fund factsheet shows a duration of 6.5 years. That's a made-up figure for the example. A one point rise in yields would cut its value by about 6.5%, or about S$1,950 on his S$30,000. His S$10,000 of T-bills, which mature within months, have a duration of about 0.25, so the same rise would cost them about S$25 on paper, and nothing if he simply waits for them to mature.
Duration is additive when you weight it by value. That makes it the easiest risk number to combine across holdings.
Marcus's fixed income is S$30,000 at a duration of 6.5 and S$10,000 at 0.25. The weighted duration is 30,000 times 6.5, plus 10,000 times 0.25, all divided by 40,000: about 4.9. So his S$40,000 of bonds and cash behaves like a single holding with a duration of about 4.9, and a one point rise in yields costs him about S$1,975 in total. Set against his whole portfolio of about S$202,000, that's under 1%.
That last step is the useful one. It turns a technical number into a sentence Marcus can act on: "A one point rise in Singapore yields costs my bond holdings about S$2,000, or about 1% of my portfolio." Professionals track this dollar change for a small move in yields, under names such as dollar duration or DV01, holding by holding, because dollar figures can be summed directly.
Bond funds report an average duration on the factsheet, usually labelled effective or modified duration, near the yield and average credit rating. Use the same label for every fund you compare.
The duration estimate is a straight line drawn against a curve. For small moves it's close. For large ones it misses in a predictable way, and the name for the bend is convexity.
Here's a made-up ten-year government bond with a 3% coupon, priced at 100 when yields are 3%. Its duration is about 8.5. If yields rise one point, duration predicts a fall of 8.5%. Priced properly, the fall is about 8.1%. If yields rise two points, duration predicts a fall of about 17%, and the full calculation gives about 15.4%. If yields fall one point, duration predicts a gain of 8.5%, and the bond actually gains about 9.0%.
So for an ordinary bond, duration overstates losses and understates gains when moves are large. That's a cushion, and many investors never need more than that. Two exceptions matter. Bonds the issuer can repay early, including many perpetual securities sold to retail investors in Singapore, can lose that cushion, because when yields fall the issuer is likely to repay and the price stops rising. And for any bond, duration itself changes as yields move, so recheck it after a big move.
A corporate bond fund carries two kinds of rate risk: the government yield underneath, and the credit spread on top, which is the extra yield companies pay. Some factsheets show spread duration separately. When corporate spreads widen in a sell-off, as lesson 3.6, Credit spreads and liquidity as early stress signals, explains, a corporate bond fund can fall even if government yields don't move.
The same idea reaches beyond bonds. Assets whose cash flows lie far in the future, such as growth companies and long-lease property, behave as if they had long duration, because their value depends heavily on the rate used to discount distant cash. Lesson 3.3, Real rates and breakeven inflation from inflation-linked bonds, works through why. It helps explain 2022, when yields rose quickly from very low levels and long-dated bonds, growth shares and REITs all fell in the same year.
Bond basics, from coupons to how yields are set, belong to Bonds, T-bills, SSBs and fixed deposits. Here you only need duration from each factsheet, a value for each holding, and the arithmetic above. For the activity, find the stated duration of every bond fund or bond holding you own, multiply each by its value in SGD, and add up the loss a one point rise in yields would cause.
Find the duration of each bond holding or bond fund you own and estimate its loss if yields rose by one percentage point.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).