Time to start taking duration risk seriously

UBS and Goldmans have just called the timing on Australian cash rate rises – early 2018, based on inflation growth. Fixed income fund/ETF investors who have benefited from falling rates need to take account. The AFR’s Christopher Joye has also rightly focused on growing fund duration risk in many articles, drawing attention to the ever increasing duration of key bond indices. The new 30 year government bond alone increased the Ausbond index duration significantly. When rates do rise and fixed-rate bond prices fall – fund & ETF prices will fall and investors are locked in. There is no option of simply waiting to maturity to recoup capital. Holding bonds individually gives investors the hold to maturity ‘out’, and this return of capital - the most basic economic feature of bonds, is lost in funds/ETFs by virtue of the perpetual vehicle. Most ASX100 corporate bonds have maturities from 3-5 years, so holding to maturity to get insulation is reasonable. It also means investors know exactly what their Total Return from income and capital will be at the point of investing.