Bond duration demystified: A guide for fixed-income investors

Updated: October 7, 2025

• Duration is a way to measure the interest rate risk of a bond and is a critical factor in fixed income investing.
• Investors can manage their portfolio's duration through their selection of bonds or bond funds.
• iShares offers investors a wide range of fixed income ETFs to navigate various potential interest rate scenarios.

Duration is a way to measure the interest rate risk of a bond and is a critical factor in fixed income investing. Duration is defined as the change in value of a bond for a 1% change in interest rates. For example, if interest rates decrease by 1% and you own a 10-year bond with a duration of 5, then the price of that security is expected to increase by 5%. (Bond prices and bond yields generally are inversely related, meaning when yields increase, bond prices drop and vice versa.)

In balanced investment portfolios, stocks and bonds traditionally make up the basic building blocks. A classic “60 – 40” portfolio is comprised of 60% stocks and 40% bonds, which historically have served three key roles in portfolios: capital preservation, income generation, and diversification.

Bonds have the potential to deliver income via cash flows from coupon payments. These typically occur on a set schedule, which is why bonds are often referred to as “fixed income.” However, one of the biggest risks for bond investors comes from changes in interest rates. That’s why managing duration risk is so important to investors — especially in an environment like the one we’re in now.

From March 2022 to July 2023, the Federal Reserve increased short-term interest rates (known as the fed funds rate) by 0.25% to a range of 5.25 – 5.50%. During that period, the broad U.S. bond market, as measured by the Bloomberg US Aggregate Bond Index, decreased by 8.8% — contributing to one of the worst 18-month periods in the history of the index.¹

The Fed was then on pause for 14 months and then cut 50 basis points (bps) in September 2024, followed by two 25 bps cuts at the October and December 2024 meetings.²

After holding rates steady for the first nine months of 2025, the Fed cut the fed funds rates by 25 basis points to a range of 4% – 4.25% at its policy meeting on September 17, 2025.³

Market consensus is anticipating additional rate cuts in the final months of 2025. Based on the FOMC’s June 2025 Summary of Economic Projections, the Fed expects overnight interest rates to decline to 3% by 2027.⁴

Since the September 2024 rate cuts, front-end yields have declined by 100 bps from 5.50% to 4.50%, but remain higher than other Treasuries maturing in 10 years or less.⁵ Historically, longer-term yields have been higher than those of bonds with shorter maturities. This compensates investors for the risk of holding bonds for a longer period, as more time equals more uncertainty about the future path of inflation and interest rates.

We anticipate that the yield curve will revert to short-term rates being lower than longer-term rates, known as a normalization of term structure, eventually resulting in an upward sloping yield curve. While short rates could eventually decline with expected Fed cuts, long-term rates will likely be driven by inflation expectations, economic growth, bond issuance and government deficit. A parallel rate shift is unlikely, and investors should be aware of where (which maturities) they hold to achieve portfolio duration.

A review of the past four rate cutting cycles (1995 – 2020) reveals a lower Fed funds target rate when there is a recession or economic shock (2001, 2007 and 2019/2020) versus a higher rate when the Fed is seeking a normalization of policy (1995 cut). See the table below for more details.

Rate changes over previous Fed cutting cycles