Why Investors Should Hold Long-Dated Bonds, Even When Interest Rates are Low

21 Pages Posted: 16 Sep 2004 Last revised: 6 Jun 2016

See all articles by Vincent van Antwerpen

Vincent van Antwerpen

Cardano Risk Management

Janwillem Engel

Cardano Risk Management

Harry M. Kat

Independent

Theo P. Kocken

Cardano Risk Management

Date Written: August 1, 2004

Abstract

Interest rates are currently at a historical low. Since in the longer run interest rates will return to their historical average, this implies that bond prices are about to fall. Popular investment advice therefore says that investors should shorten the maturity of their bond portfolios to minimize their losses. This argument, however, skips over the fact that longer-dated bonds pay higher coupons as well as the fact that a substantial rise in interest rates may take quite some time to occur. We examine the combined impact of both and conclude that the current interest rate environment in no way implies that investors should rebalance towards short-dated bonds. Extensive scenario analysis confirms that in an overall portfolio context a longer-dated bond portfolio is more efficient than a short-dated bond portfolio, especially when long-dated liabilities are present.

Keywords: Interest rates, bonds, yield curve, ALM

JEL Classification: G11

Suggested Citation

van Antwerpen, Vincent and Engel, Janwillem and Kat, Harry M. and Kocken, Theo P., Why Investors Should Hold Long-Dated Bonds, Even When Interest Rates are Low (August 1, 2004). Cardano Research Paper. Available at SSRN: https://ssrn.com/abstract=590543 or http://dx.doi.org/10.2139/ssrn.590543

Vincent Van Antwerpen

Cardano Risk Management ( email )

Rotterdam 3011 AA
Netherlands

Janwillem Engel

Cardano Risk Management ( email )

Rotterdam 3011 AA
Netherlands

Harry M. Kat (Contact Author)

Independent

No Address Available

Theo P. Kocken

Cardano Risk Management ( email )

Beurs World Trade Centre, 11th Floor
Beursplein 37
Rotterdam 3011 AA
Netherlands
+31-10-2434747 (Phone)
+31-10-4660907 (Fax)

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