Bond Funds: What Duration and Credit Risk Actually Mean
Bonds are not the safe part of a portfolio. They are the less volatile part, which is a different claim.
At a glance
Figures checked 1 Sep 2026
What to take away
- Duration estimates the percentage price change for a one-point move in rates.
- 2022 demonstrated that bond funds can fall meaningfully — they are not cash.
- Bond fund interest is ordinary income, so taxable accounts may favour municipal funds.
A bond fund holds many bonds and passes through the interest. Its price moves inversely to interest rates because existing bonds paying an old rate become less attractive when new bonds pay more.
Duration in one sentence
A fund with a duration of six years will fall roughly six percent if rates rise one percentage point, and rise roughly six percent if they fall one point. It is an estimate, not a rule, but it explains most of the movement you will see.
The mirror image is often forgotten: higher rates mean the fund reinvests at better yields. An investor with a horizon longer than the fund’s duration is generally better off after a rate rise, not worse.
Credit risk
Treasury funds carry essentially no default risk. Investment-grade corporate funds carry some. High-yield funds carry a lot, and they tend to fall when stocks fall, which undermines the reason for holding bonds at all.
Common questions
Holding an individual bond to maturity returns the principal, which feels safer. A fund's price fluctuates but it is continuously reinvesting. Over a horizon longer than its duration the difference is smaller than it appears.
Some do for behavioural reasons — a less volatile portfolio is easier to stay invested in. Purely mathematically, a long horizon favours more equity.