Municipal Bond Forum
On In the Belly of the Curvecontd #2:
Q
I see the bond term "duration" is used when describing bonds. What does duration mean and how would you incorporate this into your analysis of the "belly"? How does duration come into play when considering low-rate bonds at discount vs. high-rate bonds at premium? Thank you so much for your information. When it comes to bond investing, your firm is extremely helpful and astute.
A
James A. Klotz responds:
Duration is the weighted average maturity of a security’s cash flows. A premium bond with the same maturity as a discount bond will have a shorter average duration because more of its cash flow is delivered in years prior to maturity in the form of semi-annual interest payments. Because the premium bond has a shorter duration, it should produce a lower level of price volatility than the discount bond.
Mid-term bonds in the "belly" of the curve will have less price volatility than long-term bonds with similar structure. While investors should be aware of price volatility, we believe fixed-income investors are better served by maximizing income in their portfolios than attempting to predict price moves.
We are long-time believers in the value of premium bonds, both for their lower price volatility and superior current income streams. Unfortunately, many investors fear paying premiums, incorrectly thinking they are somehow overpaying for the bonds because they mature at 100.00. When it comes to bonds, dollar price is irrelevant. The focus should be on yield.
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The responses provided in this forum are meant to address specific questions posed by investors about their municipal bonds and to provide market insight for our general audience. Please note, your investments, objectives, results and experience may differ significantly. Our answers and any potential strategies discussed should not be construed as a solicitation to buy nor sell any security or investment product. All investing entails risk.