Duration Risk

Duration risk is the potential for bond price losses due to changes in interest rates, directly proportional to a bond's duration. Bonds with longer durations face greater price volatility — a 1% rise in rates causes approximately 1% loss for each year of duration. This risk materialized dramatically in 2022 when the Federal Reserve raised rates by 4.25 percentage points, causing the Bloomberg U.S. Aggregate Bond Index to lose 13% — its worst year on record. Long-duration assets like 30-year Treasury bonds lost over 30% of their value. Duration risk is particularly dangerous when investors assume bonds are "safe" — in a rising rate environment, even AAA-rated bonds can suffer substantial price declines. Managing duration risk involves matching portfolio duration to the investor's time horizon, using bond ladders, diversifying across maturities, and potentially incorporating floating-rate bonds or short-duration strategies. For institutional investors, duration risk is managed through hedging with interest rate swaps or Treasury futures.