Duration Targeting for Fixed Income Portfolios
I came across an interesting paper that formalizes the benefits of duration targeting in managing Fixed Income portfolios. Here’s a podcast interview with one of the authors Martin L. Leibowitz . The one neat result of his research, as he describes it, is that: after a period of 2 x targeted duration, the portfolio’s annualized yield will end up with what you started with irrespective of the volatility in between. I want to quickly check this result so created and back-tested a portfolio using PORT in Bloomberg. I was really interested to see if a Duration targeting portfolio does outperform a “buy and hold” variety. This was not meant to be a holistic result verification, but a quick trial/check. So I created two portfolios Port A] Duration Targeting Portfolio. Used PORT Optimization and Back-Testing to arrange this portfolio. Targeted Duration was 5years. So I had to analyze over a 10 year period. I selected 2010-2019-end. Port B] Buy and Hold Portfolio compris...