Duration (interest-rate sensitivity)

“Safe” is the most dangerous word in fixed income, and duration is the risk it hides in plain sight. A high-quality government bond is safe in one specific sense: barring default, you will be repaid at maturity. It is not safe in the sense most people hear, because between now and maturity its price moves with interest rates — and duration tells you how much.

The mechanics are intuition-friendly. A bond is a promise of fixed payments. When market rates rise, newly issued bonds pay more, so the old promise is worth less; the longer the promise runs, the more of its value sits in far-away payments, and the harder the repricing hits. That is why duration rises with maturity. The approximation — price change roughly equals duration times the rate change — is arithmetic, not a forecast, and it works in both directions.

Two practical consequences. First, a long-dated government bond fund can lose a double-digit percentage in a rising-rate year without anything going “wrong” — the duration simply did what duration does. Second, leverage stacked on top of a high-duration “safe” asset is one of the most dangerous structures in finance, because the safety label invites position sizes the volatility does not support. That combination — not risky assets, but leveraged safe ones — is what nearly broke the UK pension system, and the article below reconstructs it.