Mini Feature BOND DURATION RULE OF THUMB

By: Dr K C Gupta, YBB Personal Finance

CONTRARIAN INDICATORS

AAII Bull-Bear Spread +1.3% (below average)
CNN Fear & Greed Index 45 (neutral)
NYSE %Above 50-dMA 25.73% (oversold)
SP500 %Above 50-dMA 36.40% (negative)

ICI Fund Allocations (Cumulative), 8/30/26
OEFs & ETFs: Stocks 63.33%, Hybrids 3.85%, Bonds 16.83%, M-Mkt 15.99%

INTEREST RATES

CME FedWatch
Cycle peak 5.25-5.50%
Current 3.75-4.00%
FOMC 10/28/26+ hold
FOMC 12/9/26+ hike

Treasury

T-Bills 3-mo yield 4.25%, 1-yr 4.47%; T-Notes 2-yr 4.80%, 5-yr 5.02%, 10-yr 5.24%; T-Bonds 30-yr 5.60% (normal yield-curve);
TIPS/Real yields 5-yr 2.68%, 10-yr 2.91%, 30-yr 3.32%
FRNs Index 4.153% (stale)

Bank Rates www.depositaccounts.com/



Stable-Value (SV) Rates, 10/1/26
TIAA Traditional Annuity (Accumulation) Rates
Restricted RC 5.75%, RA 5.50%
Flexible RCP 5.00%, SRA 4.75%, IRA-101110+ 4.65%
TIAA MYGA 5.30% (3-yr), 5.40% (5-yr), 5.50% (7-yr)
TSP G Fund 5.375% (previous 4.875%)

India Fear & Greed MMI 20.25 (extreme fear)
Weekly ETFs: INDA -1.05%, EPI -1.58%, INDH -0.49%, SMIN -1.90% | SPY +1.16%

The data above are as of Sunday preceding the publication date.

ECONOMY. RBI raised repo rate to 5.5%.

ENERGY. Power history includes the past (actual generation) & present (installed capacity). For India FY 2026, coal was still the king with 70% generation, solar & wind 15%, & the rest from natural gas, hydro, nuclear. The installed capacity represents the future & that for clean & renewable energy capacity just exceeded that for fossils. This is due to huge growth in demand from the power sector & newer capacities are overwhelmingly for clean & renewable energy – 33% from solar, 7% from wind, & smaller amounts from hydro, wind, nuclear.
One problem is the lack of sufficient battery storage capacity & that wastes lot of renewable power generated &/or makes the electricity grid unstable. Government has now mandated the use of sufficient battery capacity for renewable energy installations, but most batteries are imported from China (80%) with the rest (20%) from S Korea, Taiwan, etc; the local battery manufacturing capacity is less than 1%.

IT/TECH. UK consumer-tech phone startup Nothing will spinoff its CMF smartphone brand in India. Nothing makes affordable basic smartphones & it has localized its Indian operations involving design, software, camera processing & supplier co-engineering. Its focus is on smartphones for the Indian market, not for exports that several other global companies are focused on. 

SPECIAL TOPIC – BOND DURATION RULE OF THUMB

Bond duration (in years) is the present-value-weighted-average of the timings of cash flows. So, the present-value (PVi) of each cash flow (i th at time Ti) is calculated at prevailing interest rate & the weights are (PVi/PV) at cash flow timings Ti.

For zero-coupon bond, the only cash flow is at maturity, so duration = maturity, but for all other bonds with periodic interest payments, duration < maturity. Mortgage bonds (MBS) have higher cash flows because each payment includes interest & some principal, so duration << maturity.

For example, for a 6% bond, duration is 30.00 for 30-yr zero-coupon bond, 13.85 for 30-yr T-Bond (semiannual interest payments; payment of par on maturity), 11.56 for 30-yr mortgage bond (monthly interest & principal payments; final value $0).

A practical definition of duration is that it’s the approximate price-sensitivity of bond to changes in interest rates (note 1% = 100 bps). So, if a bond has duration of 5 years & interest rates increase by +50 bps (+0.50%), then the value of bond will decrease by -5*0.50 = -2.5%. While the reverse will happen for interest rate decrease by -50 bps, the effect isn’t symmetrical (bond convexity effect), but may be assumed to be so in the first approximation. This can be applied to bond portfolios or funds too.

Bond portfolio escape velocity is when yield is equal to duration. Beyond that point (yield > duration), 1-yr TR > 0 even with rising rates.

The bond rule of thumb is that approximate total-return (TR) of a bond fund held for its duration is just the initial yield at the time of purchase. Reason is that bond TR includes (i) price change & (ii) reinvestments, & interest rate change affects them in opposite ways. The reinvestments (ii) at lower prices adds up quickly, & by the duration, the value increase from the second effect (reinvestments) approximately neutralizes or immunizes the first effect (value decrease). It isn’t a precise rule & exceptions may be found; bond portfolios may change too.

As a practical application, you can buy short/intermediate-term bond funds for various needs (down payments, home improvements, major appliances, vacation, etc).

For more information, see https://ybbpersonalfinance.proboards.com/