Using Aggregate Bond Duration

I am reading “The Strategic Bond Investor,” by Anthony Crescenzi. The copyright is 2010, so the author wrote just after the 2008 financial crisis but missed the Great Recession and recovery and, of course, the 2020 Covid crisis with the Fed’s extreme emergency fed funds cut and buying of all kinds of debt.

Crescenzi is an executive vice president, market strategist and generalist portfolio manager at PIMCO.

As a bond trading professional, Crescenzi uses market indicators that I have never heard of. One of these is the aggregate duration of the bond market. This indicator can be used to analyze the market’s expectation of Federal Reserve interest rate changes, which affect the stock as well as the bond market.

All bonds pay par value if held to maturity. But before maturity, a bond’s value rises if interest rates fall and falls if interest rates rise.

The longer the maturity of a bond, the higher its duration. Duration is a measure of a bond’s price sensitivity to changing interest rates. Longer duration bonds change more than shorter duration bonds when interest rates change.

For every year of duration, a bond will LOSE about 1% in value for each 1% rise in interest rates. This means that a 5-year bond will lose 10% of its value if interest rates rise 2%.

For every year of duration, a bond will GAIN about 1% in value for each 1% drop in interest rates. This means that a 5-year bond will gain 10% of its value if interest rates fall 2%.

https://www.investopedia.com/terms/d/duration.asp

Bond traders are happy when a recession starts because then the Fed will cut the fed funds rate and most other interest rates will follow downward. That makes all their existing bonds worth more. So a “bear” market in stocks (a recession which causes the Fed to cut rates) is often a “bull” market in bonds. Since their long-term bonds will rise more than their short-term bonds, they move to long-term bonds. Then the aggregate duration of their bonds will rise. In 2001-2003 and 2009, when the Fed was cutting rates because of recessions, the aggregate duration of bonds by portfolio managers was higher than normal.

Bond traders hate times like now when the Fed is raising interest rates because the economy is “too hot” and inflation is rising. Since their long-term bonds (high duration) will lose value more than their short-term bonds, they move their portfolios to shorter-term bonds. When the Fed was raising rates from 2004-2006, the aggregate duration of bonds by portfolio managers was lower than normal.

According to Crescenzi, bond investors are very sensitive to changes in the Fed’s policies. The aggregate duration chart he shows clearly exhibits sharp changes in aggregate duration at macro inflection points which would affect both bonds and stocks. Unfortunately, I am not able to find the two companies he mentions (Ried Thunberg and Stone & McCarthy Research Associates smra.com) or any other source of aggregate duration that includes current data.

I would appreciate help finding a chart of aggregate duration.

The closest I came was the S&P U.S. Aggregate Bond Index which is designed to measure the performance of publicly issued U.S. dollar denominated investment-grade debt. The index is part of the S&P Aggregate™ Bond Index family and includes U.S. treasuries, quasi-governments, corporates, taxable municipal bonds, foreign agency, supranational, federal agency, and non-U.S. debentures, covered bonds, and residential mortgage pass-throughs. This index is a gemisch of all kinds of bonds and durations so it doesn’t give the same information as aggregate duration.

It’s clear that bond values are falling, a sign that the bond market believes the Fed will raise interest rates as it said it would.
https://www.spglobal.com/spdji/en/indices/fixed-income/sp-us…

The 2-year Treasury, which historically trends with the fed funds rate, has stabilized at 2.6% over the past few days after a rapid rise. This implies that the bond market thinks that the fed funds rate will be 2.6% in 2 years. The Fed recently raised the fed funds rate to 0.75% and predicted two more 0.5% raises in June and July. The bond market is accepting 1.75% but also expecting further raises of less than 1% in late 2022 and 2023.

The 10 year Treasury has dropped a little (2.787%), which could be noise or it could be a sign that the market thinks the Fed will push the economy into recession.

Since both these rates are far below the Fed’s preferred inflation rate, Personal Consumption Expenditures Price Index = 6.6%, the market seems to be saying that the Fed will be able to get inflation under control by inducing a slowdown while still keeping real yields deeply negative.

This doesn’t make sense to me. They need to raise rates above the inflation rate to quell inflation.

What does make sense is that, at some point, the Fed will push the economy into recession. Then they will feel obliged to cut interest rates to stimulate a recovery. When they begin to cut, bond portfolios should be pushed out to longer durations. Afterward, stocks will recover, though probably not to the current bubble valuations.

Wendy

https://www.spglobal.com/spdji/en/indices/fixed-income/sp-us…

https://stockcharts.com/freecharts/yieldcurve.php

https://stockcharts.com/freecharts/candleglance.html?$IRX,$U…

https://www.bea.gov/data/personal-consumption-expenditures-p…

16 Likes

I would appreciate help finding a chart of aggregate duration.

There are several ETFs that track the Bloomberg aggregate bond index (the ‘agg’). For example, pull up a chart of AGG which goes back to late 2003.

DB2

Yes, these are similar to the one I posted. They include all the bonds of all durations. That’s not what I am looking for.

I am looking specifically for aggregate duration – that is, the duration (average time to maturity) of the bonds, not the value of the bonds.

Thanks,
Wendy

I am looking specifically for aggregate duration – that is, the duration (average time to maturity) of the bonds, not the value of the bonds.

That appears to be available to institutional or academic investors or at least those with a Bloomberg terminal. Here is a graph going back to 1978:
https://www.hartfordfunds.com/dam/en/docs/pub/whitepapers/CC….

DB2

1 Like

Thank you. :slight_smile:

Now, is there a link to a continuously-updated chart of this data? That would be a great addition to the Control Panel.

Wendy

Now, is there a link to a continuously-updated chart of this data?

I don’t think we have any posters who work in the financial industry. Maybe academia, as the terminals are sometimes available at B-school libraries.

DB2

Wendy, I owe you for some links you dropped on me about Vitamin D (which I get plenty of down here at Latitude 24 when I work in the yard daily) and so here we go. Still burning off brain fog today from the COVID match I won, so, my hunt is not complete. This is what I’ve dug up so far and I hope one of these proves to help you.

Also, thanks for this concise lesson you have just given here on bonds.

Okay, stockcharts has the following symbols, and I’ll leave you, Dr. Bob, and I hope, Notehound, to weed through these and find our best indicator of the bunch. I really like this idea and will come back to it once I’m even more clear-headed.

Let me know what you choose and I’ll add that to my weekly end of week looks too:

Let’s hope you can find something here worth following:

$AGG - iShares Core US Aggregate Bond ETF (can be followed in daily Japanese candlesticks)

$BAGIX - Baird Aggregate Bond Fund (line chart only)

$BAGSX - Baird Aggregate Bond Fund (line chart only)

$JAGG - JP Morgan US Aggregate Bond Fund (can be followed in daily Japanese candlesticks)

$PAB - PGIM Active Aggregate Bond ETF (candlesticks showing only opens and closes)

$SCHZ - Schwab US Aggregate Bond ETF (can be followed in daily Japanese candlesticks)

$USFR - WisdomTree Bloomberg Floating Rate Treasury Fund

Note that last entry is the only one I could find with the word “bloomberg” in a title line for bond funds and ETF which are shown around key words “aggregate” or “bloomberg” or “Bonds”,

In none of these pan out, suggest some other key words.

p.s. Two end of week threaded unrolls on one page of my work from yesterday

1) End of Week Updates Monthly/Weekly charts
Fri, 20 MAY 22

*Alt-Energies Big Winners This Week! (highlighted)

https://threadreaderapp.com/thread/1525304183540400135.html

Note: the above list is where I’ll add whatever aggregate bond fund you folks decide on. And I’ll add that in the area with yields for the 10, 20, and 30 year Treasuries.

And here is my end of week look at the $SPX S&P 500 and its Eleven Sectors for the week ending Friday, 20 MAY 22:

  1. https://threadreaderapp.com/thread/1525304183540400135.html

And if you ever want, you have a standing invitation to steal any of my charts off Twitter or these newer thread app line ups and you don’t need to give attribution to me. Just keep putting together your usual weekend dashboard.

We need to take your work to Twitter and I can do that with screen shots that I can thread, link to here on METAR, and then unwind on the thread reader app as I’ve done above for Fools who hate Twitter. But were I you, I’d join Twitter and enter the fray. You’ll find some outstanding bond voices to follow such as @elerianm Muhammad el Erian is one you will want to follow. He and Jeremy Grantham (I follow his stuff on youtube) have been early - but right - on where we would arrive on inflation, bond rates, corporate bond defaults, the cascading waterfall on corporate junk bond downgrades, etc.

Thanks.

p.p.s. Bonus video link interview (and edited transcript) of Dalio and Jeremy Grantham posted May 17th. You can follow Dalio on Twitter @RayDalio

https://www.bridgewater.com/research-and-insights/ray-dalio-…

The founders of Bridgewater and GMO discuss the big risks they’re watching, including inflationary pressures, political conflict, asset bubbles, and climate change—and what investors can do to protect themselves.

The conversation, which was recorded on May 9, is moderated by Jim Haskel, editor of the Daily Observations, and Alex Shahidi, co-CIO of Evoke Advisors, and is separated into two broad sections. In Part 1, Ray and Jeremy cover the major risks they are tracking — including strong inflationary pressures, rising political conflict, and asset bubbles. Then, in Part 2, they talk through how investors can adjust their portfolios to prepare for these risks. Jeremy concludes the discussion by describing the threat that climate change and the overuse of natural resources poses to humanity, and the most promising solutions he sees to these problems.

Transcript
Note: This transcript has been edited for readability.

p.p.s. And keep giving me Mulligans for any misspellings or bad syntax. Still burning off that COVID fog. I prefer visuals (charts, not psychedelics) and music when I’m doing freeform work such as “search” on Twitter and stockcharts dotcom.

2 Likes

Thank you for your links. Feel free to post my stuff on Twitter with attribution.

All of the links you posted were the value of aggregate bond funds, which is a mixture of bonds of all durations. I’m interested in the aggregate duration, not in the valuations.

I prefer to look at more detailed charts of bond valuations rather than aggregates. This panel shows Treasuries of varying durations and also a junk-bond fund. The junk bond spread is climbing in anticipation of defaults during the probable recession.

https://stockcharts.com/freecharts/candleglance.html?$IRX,$U…

https://stockcharts.com/freecharts/yieldcurve.php

https://fred.stlouisfed.org/series/T10Y3M

https://fred.stlouisfed.org/series/T10Y2Y

https://fred.stlouisfed.org/series/BAMLH0A3HYC

The yield curve has flattened as the 2-year yield rose faster than the longer end of the yield curve. While the short end is still low yield, the Fed has already told us that by August it would be 1% higher than it is now. That makes the yield curve pretty darn flat. If the bond market thinks that the Fed will be raising interest rates, all their long-duration bonds will lose value so they will dump them. Selling long-term bonds will depress their price (raise the yield) which is why the yield curve usually inverts several months before a recession but then goes back to a positive slope.

Personally, I am buying short Treasuries (3 - 6 month) to get a little yield but expecting to see higher yields when they mature. No way would I buy long-term bonds at this point. Trillions of dollars in long-term bonds of all kinds (including Treasuries) will massively lose value once the Fed abandons its emergency monetary pumping.

I’m looking for a chart that will show the shift of duration from long to short bonds.

Thanks,
Wendy

2 Likes

I do have a Twitter account but I would rather my financial analysis remains anonymous.
Wendy