Duration Risk
The sensitivity of a bond's price to changes in interest rates, increasing with longer maturities.
What is Duration Risk?
Duration risk is the exposure to price loss that a bond or bond portfolio faces when interest rates rise. Duration measures how sensitive a bond's price is to a 1% change in interest rates: a bond with a duration of 8 years will fall approximately 8% in price if rates rise by 1 percentage point. Longer-maturity bonds and lower-coupon bonds have higher durations — meaning they are more sensitive to interest rate changes. Duration risk became painfully evident in 2022, when rapidly rising rates caused long-duration bond funds to fall 20–30%, their worst performance in decades. Managing duration risk is a primary concern for bond portfolio managers.
Example
In 2022, the Federal Reserve raised rates by 4.25 percentage points in one of the fastest tightening cycles in history. The iShares 20+ Year Treasury Bond ETF (TLT), which holds long-duration Treasury bonds with an average duration near 17 years, fell approximately 31% — demonstrating how duration risk can cause bond losses as severe as equity bear markets.