What it means
Duration measures how much a bond's price changes for a 1% change in interest rates. A bond with duration of 7 will lose about 7% of its value if rates rise 1%, and gain about 7% if rates fall 1%. Longer-maturity and lower-coupon bonds have higher duration.
Why it matters
Duration is what blew up Silicon Valley Bank in 2023. They held long-duration Treasuries that lost value when rates rose, while their deposits left immediately. Duration mismatches kill banks, pension funds, and insurance companies far more often than credit losses do.
How to use it
Match duration to your liabilities. If you're investing for a 3-year goal, don't buy 30-year bonds. If you're a bank, your asset duration and liability duration should be roughly aligned.
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