Why Investors Should Hold Long-Dated Bonds, Even When Interest Rates are Low
21 Pages Posted: 16 Sep 2004 Last revised: 6 Jun 2016
Date Written: August 1, 2004
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: Suggested Citation