Are derivatives hiding risk in your bond portfolio?

Gene Tannuzzo, CFA, Senior Portfolio Manager, Strategic Income

Derivatives can be useful tools when used strategically. What investors need to know.

Derivatives do not, on their own, have value. By definition they derive their value from the price of another asset. They can be valuable tools in modifying the risk profile of a portfolio, but in our view should not be used as the basis of an investment portfolio. Investors should be aware of where their risk is coming from, including the use of derivatives. Learn more about how Gene Tannuzzo views derivatives.


The views expressed are as of November 2016, may change as market or other conditions change and may differ from views expressed by other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates. Actual investments or investment decisions made by CMIA and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate.

Investing in derivatives is a specialized activity that involves special risks that subject the portfolio to significant loss potential, including when used as leverage, and may result in greater fluctuation in portfolio value.

There are risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer term securities.

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