Hi all,
Just wondering if someone can please explain why we need to increase asset duration if interest rates are expected to fall?
Is this related to the increase of PV of Liability which leads to higher duration of the liability?
If so, what is the logic that higher PV of Liability increases the duration of the liability?
duration is the sensitivity measure of bond value to changes in interest rates. If duration is high, then a set amount of change in interest rate will bring higher change in bond value.
Your case: if interest rates are expected to fall, then your bonds will raise in value. So, why not increase duration of your bonds and raise even more in value, if you are confident in your interest rate forecasts?