Understanding Duration Risk: Why Private Credit Isn’t the Same as Long Bonds

In fixed income, duration is the measure of a bond’s sensitivity to changes in interest rates. The longer the duration, the more the price can move when rates shift. For investors who rely on income and capital preservation, this risk isn’t just academic – it’s real.

Imagine holding a 30-year bond yielding 4%. If the benchmark rate jumps to 5%, the bond’s market value could fall significantly – even though the coupon remains unchanged. That’s duration risk in action.

Traditional Bonds Face Duration Headwinds

Long-duration bonds became popular during the ultra-low interest-rate era of the 2010s. The strategy: lock in income, hold for the long term. But today, with interest rates higher and inflation still in view, the risk profile has changed:

• Rising rates hit long-dated bond prices the hardest.
• Reinvestment yields for shorter bonds may be higher moving forward—reducing the appeal of long maturities.
• When duration risk materialises, even “safe” fixed income portfolios can show significant drawdowns.

In this environment, investors are asking: is there a fixed income alternative that delivers income without absorbing large duration risk?

Private Credit Offers a Different Risk-Return Profile

Private credit (or private debt) provides an interesting contrast:

• Loans are typically short-to-medium term (12-36 months) or floating rate, so their duration is low.
• Income is driven by contractual interest, not bond-market pricing.
• Collateral and first-lien security can protect capital, independent of mark-to-market value swings.
• Because of these features, private credit is less exposed to interest-rate shocks than long bonds.

In other words: while duration risk private debt still exists, it’s far smaller and more controllable than with long bonds.

Why Duration Risk Matters Less in Private Credit

Shorter Loan Maturities

Many private credit deals mature in two to three years rather than decades. That means you’re not sitting on a loan exposed to decades of rate hikes and inflation surprises. You’re getting interest now, and you’ll get your principal back sooner.

Floating-Rate Structures

Some private loans carry floating rates indexed to benchmarks (such as SOFR or LIBOR + spread). When rates rise, your income can rise too—softening the blow from a rising interest-rate environment.

Collateral Security

Loans secured by real estate, equipment, or business assets mean value behind the debt. If the borrower struggles, the collateral is there. Traditional bonds, especially unsecured long corporates, don’t have that cushion.

Reduced Market Price Volatility

Because private credit loans aren’t traded daily in public markets, you avoid large price swings tied to rate changes. Your returns come from payments, not market sentiment.

Case Study: Bond Portfolio vs Private Credit Allocation

Consider a hypothetical investor, Maria, age 55, who allocates $1 million between:

• A 10-year corporate bond portfolio yielding 5%.
• A private credit fund yielding 9% annually, average maturity 2 years, first-lien real estate-backed.

Year 1 Scenario: Rising Rates

Say interest rates rise by 1%. The 10-year bond portfolio sees its market value drop, maybe 6–8%. Maria’s private credit fund? Income remains steady, and principal is only 2 years away from repayment—duration risk is far less.

Outcome

At the end of 12 months:

• Bond portfolio may show a loss despite coupons.
• Private credit delivers its yield with minimal principal risk—assuming underwriting is solid.

This illustrates how using private credit as a fixed income alternative helps reduce exposure to duration risk while preserving income.

How to Incorporate Private Credit Into Your Fixed Income Strategy

• Assess your interest-rate views. If you believe rates will stay elevated or move higher, favour shorter duration assets like private credit.
• Evaluate fund terms. Check loan maturities, whether yields are fixed or floating, lien positions, and collateral.
• Diversify wisely. Don’t replace all bonds with private credit, but consider allocating a portion (e.g., 20-30%) for income missions.
• Understand liquidity. Private loans may have lock-ups or less frequent redemption windows. Make sure that matches your needs.
• Check manager track record. Underwriting matters more than yield in a rising-rate world.

Summing up

Duration risk is a silent but potent force in fixed income. In a world where rates may stay high longer and inflation remains a concern, long bonds expose capital to volume swings. Private credit presents a compelling alternative: a strategy with income, collateral protection, shorter duration, and lower correlation to traditional markets.

For high-net-worth and accredited investors seeking income, stability, and better control of risk, private credit is more than diversification—it’s a strategic complement to long bonds, not a replacement. Learn more what LBC Capital Income Fund, LLC income fund can offer.