Bond managers are on the defensive, lowering the duration of their portfolios and investing in TIPS in anticipation of a hike in interest rates.
"We have been telling our clients since January that they should shorten their maturities and lower duration to five years or less," said Anthony Chan, chief economist at Banc One Investment Advisors Corp., Columbus, Ohio. "They should avoid durations over that because, as rates rise, they can get hurt." Banc One has $52 billion in fixed-income assets under management for tax-exempt clients.
Duration is the time it takes to recover half of the present value of the future cash flow of a bond or bond portfolio. When interest rates are rising, it's preferable to be invested in shorter-duration bonds because the market value of the bonds will fall. Those with longer maturity will be worth less by the time they mature.