What is a Target Duration product?A target duration strategy uses various products aiming to maintain a specific and precise level of duration sensitivity throughout varying interest rate environments. For example, a two year target duration product seeks to maintain a duration of two years whether interest rates fall, rise or remain the same. Target duration products can help manage interest rate risk at either the instrument, asset class or balance sheet level without the complexity of monitoring for duration drift and rebalancing execution.
|
Key Use Cases
IRR Management: The maintenance of a specific duration provides a highly predictable sensitivity to changes in interest rates. This can help your credit union remain in accordance with its stated permissible interest rate risk level.
Duration Matching: The matching of the duration of your liabilities with the equivalent target duration can help reduce interest rate risk and portfolio immunization.
Tactical Duration Exposure: The ability to select a preferred duration exposure can be used to diversify portfolio duration, hedge interest rate risk or target a specific segment of the yield curve.
Target Duration Products
Access a range of target durations to express views across the yield curve and precisely manage portfolio duration. Target durations for U.S. Treasuries and TIPS include: 6 month, 1, 2, 3, 5, 7, 10, and 20 years.
The diagram above shows the theoretical impact a rate shift has to the price of bonds based on their duration. It’s important to remember this impact can be ‘priced in’ based on market expectations/anticipation ahead of a cut. These expectations also can lead to volatility in longer duration securities as the market speculates around each new economic data point and what it means for a future cut. There is no guarantee that strategies will perform according to the data in the above table.
|
