March 2021 / INVESTMENT INSIGHTS
Why Credit Investors Need to Become Active Duration Managers
The importance of duration for credit performance and five ways to improve it
Key Insights
- Duration has become a key driver of credit returns over the past decade, highlighting the importance of active duration management for credit investors.
- Techniques to manage duration include using structural curve positioning, allocating across regions and currencies, and using derivatives.
- Actively managing the total duration of a portfolio by adjusting duration exposure for short periods can also significantly enhance returns.
Duration Has Been a Major Driver of Credit Returns Over 10 Years
(Fig. 1) In most strategies, it has exceeded returns from credit impact
As of December 31, 2020.
Past performance is not a reliable indicator of future performance.
Sources: Bloomberg Barclays U.S. Corporate Bond Index, Bloomberg Barclays U.S. ABS Index, Bloomberg Barclays Euro Corporate Bond Index, Bloomberg Barclays U.S. High Yield Bond Index, and Bloomberg Barclays EM Sovereign and Quasi Sovereign Bond Index (see Additional Disclosure). Analysis by T. Rowe Price.
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Kenneth Orchard is head of International Fixed Income. He is portfolio manager for the Global Multi-Sector Bond and Diversified Income Bond Strategies and co-portfolio manager for the International Bond Strategy. Kenneth is a member of the Fixed Income Steering Committee, cochair of the fixed income Sector Strategy Advisory Group, and a member of the European and UK Asset Allocation Committees. He is a vice president of T. Rowe Price Group, Inc., and T. Rowe Price International Ltd.
Steve Boothe is the head of Investment Grade and a portfolio manager in the Fixed Income Division. He has lead portfolio management responsibilities for the Global Investment Grade Corporate Bond, US Investment Grade Corporate Bond, and Dynamic Credit Strategies. He is a member of the Sector Strategy Advisory Group, with a focus on global and U.S. investment-grade corporate bond portfolios. Steve is a co-president of the Investment Advisory Committee of the Corporate Income Fund and a member of the Investment Advisory Committees for the Investment-Grade Corporate Multi-Sector Account Portfolio, Global Multi-Sector Bond Fund, New Income Fund, and Institutional International Disciplined Equity Fund. In addition, he also is an Investment Advisory Committee member of the Institutional Income, International, Global, and China Evolution Equity Funds and an Investment Advisory Committee member of the Institutional Long Duration Credit, Dynamic Credit, and International Disciplined Equity Funds. Steve also is a member of the Fixed Income Steering, Global Trading, and Core/Core Plus Strategy Committees. He is a vice president of T. Rowe Price Group, Inc., and T. Rowe Price Associates, Inc.