Learn more about interest rate sensitivity
Interest rate sensitivity measures bond and bond fund volatility in response to interest rate changes. Bond prices change in the opposite direction of interest rate changes. We refer to the magnitude of the price change as interest rate sensitivity, and the longer a bond's maturity, the greater its sensitivity to changes in interest rates.
Broad diversification of bond holdings helps to reduce risk. Investors may also choose not to diversify (within limits) if they're aware of the trade-offs. For example, an investor may emphasize short-term bonds to minimize interest rate sensitivity (and give up the higher income that longer-term bonds provide).
How we determine interest rate sensitivity
This analysis includes both individual bonds and bond funds. The "Taxable" bond category includes all Treasury, agency, mortgage, and corporate bonds, regardless of their registration type. For example, a Treasury bond in an IRA is still grouped in the "Taxable" bond category. Bond funds are categorized based on their 9-box bond style. The only exceptions are the share classes of Vanguard® Total Bond Market Index Fund and Vanguard Balanced Index Fund, which are divided according to the breakdown of the Barclays Aggregate Index.
Morningstar measures interest rate sensitivity using the duration of a fund's bond portfolio. If duration is not available, then nominal maturity is used for municipal bond funds. Morningstar uses the following criteria to classify a bond as high, medium, or low:
Vanguard uses a fund's long-term focus to determine its 9-box category. Individual bonds are classified according to their maturity. A maturity of less than 5 years is "low," 5 to 10 years is "medium," and greater than 10 years is "high." In some cases, assets are labeled "Other." This occurs when we have insufficient data to classify the asset.
For Vanguard funds and brokerage holdings, prices and shares used to compute your account value are as of the previous business day. For investments you entered in Outside Investments, prices may be from today's close, especially if you’re viewing them after the market close, which is generally 4 p.m., Eastern time.