Waiting to extend: A forward-looking approach to fixed income investing

Investors sometimes want to invest with a money manager who will shorten portfolio duration in advance of an expected increase in interest rates. The problem with any strategy that depends on predicting changes in interest rates is that you can be right about the direction, but wrong about the timing. As a result, your return could be less than you would have received by simply investing in a long-term bond. Here we offer a tool for quantifying the consequences of delaying one’s purchase of long-term bonds, and for setting a target that interest rates must reach in order to justify such a delay.