Fund companies report modified duration or effective duration (when there are callable or puttable bonds) because those measures reflect interest rate sensitivity while Macauley duration is simply a measure of length.
I think Macaulay duration normally is used for duration-matching when done at insurance companies. I also think that is what fund companies report for their funds.That is correct, but using Macauley for one and comparing to modified for the other introduces additional variance in the result. Most likely, the data published by fund companies is the Macauley duration, although their explanation for how to interpret it would suggest that it is a modified duration.
For smallish yields, there is little difference between the Macaulay duration and the modified duration.
Because Macaulay/Modified Duration only protects against a parallel shift in the yield curve, financial institutions will use other methods to hedge against Yield Curve Risk (non-parallel shifts). Key Rate Duration (KRD), for instance, was specifically introduced in 1992 by Thomas Ho because it had been found that relying solely on a single duration number failed dramatically when curves flattened or inverted.
While the sum of all Key Rate Durations for a portfolio is typically equal to its effective or modified duration, KRD does more than immunize the parallel shifts that effective or modified duration are limited to immunizing. KRD will also protect the portfolio against flattening and inversion.
A simple strategy of blending funds to match duration simply will not protect against the yield curve flattening or inverting, which is what we typically see in an inflationary environment. More sophisticated techniques such as KRD or Stochastic Modeling are needed. Cash Flow Matching, which ladders approximate, is another.
This is known and has been known for quite some time.
See Ho, T.S.Y. (1992). Key Rate Durations: Measures of Interest Rate Risks. The Journal of Fixed Income, 2(2), 29–44. It is considered the foundation for modern risk management practices that address Yield Curve Risk (non-parallel shifts), which simple duration matching fails to capture.
Statistics: Posted by typical.investor — Mon Nov 24, 2025 12:09 am — Replies 203 — Views 15468