The largest core bond funds have increased their duration in the period since the Federal Reserve began raising the discount rate in December 2015. The average duration of the five largest bond funds increased to 5.9 from 5.1 over the three years ended March 31, while the 25 largest funds increased their rate exposure to a slightly lesser degree. The two groups split in 2017 as the top five added duration while the larger set pared it back. This year’s rise in durations might be a response to the flattening of the yield curve and bond managers feeling more comfortable in longer-term rate volatility, particularly as the ability to generate returns has been challenged, forcing funds farther out on the yield curve to find alpha.
