Research
Bond fund risk is duration, credit, yield definition and liquidity
A bond fund is a changing portfolio with a fee and a market price. Duration says something about rate moves. The credit spread says something about the borrowers. The yield on the factsheet is only useful once you know which yield it is.
Key points
- Yield-to-maturity, distribution yield and a regulator’s standardised yield are not interchangeable.
- Government yields and credit spreads can move in opposite directions.
- An exchange-traded fund’s market price can leave net asset value when the creation process is strained.
What is going on
Modified duration is an approximate map from a yield change, in percentage points, to a percentage price change: multiply and change the sign. Spread duration does a similar job for the credit spread. A fund’s duration is a snapshot of the portfolio that day. It changes as bonds mature and as the manager trades. Liquidity is both the bonds underneath and the market for the fund’s own shares. Authorised participants usually keep those close. They are not obliged to do so at a price the holder hoped for.
Why it matters
A holder who buys because the distribution yield is high may be looking at a fund whose price has already fallen, or at a payout that includes a return of capital. The economic yield is what the portfolio is priced to earn if the bonds perform and are held, minus costs, and it is still not a promise. Expenses reduce it. The fee calculator on this site compounds a fee you type. It does not know a fund’s yield.
What to watch
Read the factsheet date, the duration, the credit mix and which yield is printed. In stress, compare market price with net asset value. A discount is a liquidity fact, not a measure of virtue.
Risks
The duration identity fails for large moves and for bonds with calls. Ratings can be wrong. A fund can be forced to sell into a wide spread. This note does not assign a risk score.
Hypothetical sensitivity
A portfolio with modified duration 6 and a parallel yield rise of 0.50 percentage points has an approximate price change of minus 3 percent. The same portfolio with an extra spread widening of 0.25 percentage points, and a spread duration near 6, adds about another minus 1.5 percent. Income over a month does not offset that. The numbers are a worksheet, not a bond in issue.
Related
Sources and review
Written by: WiT Markets Editorial. Writes and structures WiT Markets pages. Separates a sourced fact from a cell that is Not confirmed.
Review: Editorially reviewed. This is not a qualified specialist review and it is not a legal sign-off.
Last reviewed: . Next review due . The date is an editorial pass. It is not a live check of every third-party fee.
Regulatory and official sources
- U.S. Securities and Exchange Commission — checked 13 October 2026
- Investor.gov — checked 13 October 2026
Methodology. Editorial policy. Corrections. Report an error.