Investing - Theory, News & General • Re: TIPS or munis in taxable

I would have expected bond funds of relatively similar durations to perform relatively the same at a time

Again duration of callable bond funds does not work like duration of non-callable bond funds.

All of us with mortgages basically understand the problem.

You are a lender and hold a portolio of 30-year mortgages with a borrowing rate of N%. Market mortgage rates drop to N-1%. The borrowers in our portfolio refinance to N-1%. Our portfolio ends up with a very short observed duration as a result.

OK, same portfolio, but market rates go up to N+1%. The borrowers in our portfolio just don't do anything. Our portfolio ends up with a very long observed duration.

So far not that hard to understand, but now imagine this is a rolling portfolio. And now imagine the following sequence. Borrowing rates have been N% for a long time, so our portfolio is mostly at N%. Market rates go up to N+2%. Not a lot of immediate change in our portfolio, but as time goes on, it rolls into more N+2% mortgages. OK, then market rates go down to N+1%. Borrowers at N+2% refinance, so that looks like very short duration. Borrowers at N%, though, don't do anything, so that looks like very long duration. And the overall portfolio result depends on the relative mix of N+2% and N% at the time it goes to N+1%.

This means the whole relevant rate history can matter to rolling callable bond portfolios. And the relevant history is potentially as far back as the longest terms in the portfolio. Which with a long-term callable bond portfolio, can be very long. Or not, depending on the rate history.

I'll admit because I have never invested in rolling callable bond portfolios myself, I have not spent a lot of time trying to master how to apply all this to different rate histories available at places like FRED. I just know the problem exists, and so I know you really can't compare the reported durations of callable bond portfolios and non-callable bond portfolios and assume that tells you how they will both have responded to a recent rate change.

Statistics: Posted by NiceUnparticularMan — Thu Jul 30, 2026 6:20 am