Duration made intuitive: what “rate sensitivity” really means
Published: 2026-04-24
When market yields move, bond prices move in the opposite direction. Duration is the simple number that tells you about how sensitive a bond (or a bond ETF) is to that change.
One-sentence definition
Duration ≈ “% price change for a 1% (100 bp) change in yield”, with the sign flipped (yields up → prices down).
Quick rule: Price change (%) ≈ − Duration × Yield change (%).
A simple example
- Bond ETF duration: 7
- Market yields rise by +1.0% (100 bp)
- Approx. price move: −7%
This is a sensitivity estimate, not a forecast. Real outcomes differ because yield curves don’t move in a perfectly parallel way, and because coupons, credit spreads, and convexity matter.
Why duration matters more for bond ETFs
Individual bonds mature and return principal. Most bond ETFs continuously replace maturing bonds with new ones. So the fund’s duration typically stays in a range (for example, 6–8 years) instead of drifting toward zero like a single bond held to maturity.
Duration is not maturity
Maturity is “when principal is repaid.” Duration is “how much price can swing when yields move.” Two funds can have similar average maturity but different duration depending on coupons and the mix of bonds.
If you want the common confusion cleared up, see: Duration vs maturity.
Practical rules beginners can use
- Match duration to your time horizon. If you may need the money in ~1–3 years, a long-duration bond ETF can be a rough ride.
- Use shorter duration for the “stability” bucket. If bonds are there to reduce portfolio volatility, short-term bonds / money-market-like ETFs are often the calmer choice.
- Don’t chase yield without asking “why is it higher?” Often it’s because duration is longer, credit risk is higher, or both.
- Remember what duration does not cover: credit-spread moves, defaults, currency risk (if unhedged), and liquidity stress.
What to check on a bond ETF factsheet
- Effective / modified duration (the sensitivity number)
- Average maturity (useful context, not the same thing)
- Credit quality (government vs corporate, IG vs HY)
- Currency exposure and whether the share class is hedged
A calm takeaway
If you remember only one thing: longer duration = bigger swings when rates move. Choose duration based on what the bond part of your portfolio is supposed to do for you (stability vs return), and on when you might need the money.