The following excerpt comes from an article titled "Securities Counselors Eyes Cutting Duration" in the February 17, 1992, issue of BondWeek, p. 5:
"Securities Counselors of Iowa will shorten the 5.
3 year duration on its $250 million fixed-income portfolio once it is convinced interest rates are moving up and the economy is improving … It will shorten by holding in cash equivalents the proceeds from the sale of an undetermined amount of 10-year Treasuries and adding a small amount of
high-grade electric utility bonds that have short-maturities if their spreads widen out at least 100 basis points … The portfolio is currently allocated with 85% to Treasuries and 15% to agencies. It has not held corporate bonds since 1985, when it perceived as risky the onslaught of hostile corporate takeovers …"
Why would Securities Counselors want to shorten duration if it believes that interest rates will rise?
Securities Counselors is planning for the possibility that interest rates will increase. The plan involves shortening its duration so that it can be in a position to reinvest funds in longer term investments. This is because a short duration implies investments will be maturing and thus these funds will be available to buy securities with a higher coupon rate if interest rates do increase.
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