Duration Matching Strategy¶
A duration matching strategy is a fixed-income immunization technique that neutralizes interest rate risk by setting a bond portfolio's duration equal to the duration of a known future liability. When the two durations are aligned, parallel shifts in the yield curve produce offsetting changes in asset value and liability present value. The result is a portfolio that can fund the target obligation regardless of subsequent rate movements.
HOW IT WORKS¶
Duration measures a bond's price sensitivity to a 1% change in yield, expressed in years using the Macaulay duration formula:
Macaulay Duration = Σ (t × PV(CF_t)) / Σ PV(CF_t)
For a portfolio, duration is the market-value-weighted average of each holding's duration. The immunization condition is simple:
Portfolio Duration = Liability Duration
When this equality holds, a small parallel yield curve shift causes the portfolio's value and the liability's present value to move by the same amount, preserving the funding surplus. For larger or non-parallel shifts, convexity must also be matched to eliminate residual error. The strategy requires periodic rebalancing because portfolio duration and liability duration drift at different rates over time.
IN TAPEBOARD¶
Use the Duration column in the Portfolio Analytics panel to monitor your portfolio's weighted average modified duration in real time. Set a duration target in the Liability Dashboard by entering your liability horizon and notional amount; Tapeboard calculates the required portfolio duration and flags any drift beyond your chosen tolerance. The Rebalancing Alerts module notifies you when a yield curve shift or cash flow event pushes portfolio duration outside the matched range, prompting a trade suggestion to restore immunization. Convexity figures are displayed alongside duration so you can assess residual risk from large or non-parallel rate moves.