What is one benefit of having a higher Duration Gap?

A higher Duration Gap measures the sensitivity of a portfolio's interest rate risk relative to a benchmark or liability. When a portfolio has a higher Duration Gap, it indicates that the assets and liabilities within that portfolio are mismatched in terms of their sensitivity to interest rate changes. This greater sensitivity means that the value of the assets is likely to be more affected by fluctuations in interest rates compared to the liabilities.

This characteristic can be beneficial under certain conditions, particularly when an investor anticipates falling interest rates. In such scenarios, a larger Duration Gap can potentially lead to higher returns, as the assets will appreciate more in value when interest rates decline. This makes the choice very appealing to investors who can foresee a drop in interest rates and who are looking to maximize the performance of their investments in that environment.

In contrast, having a lower Duration Gap tends to imply reduced sensitivity to interest rate changes, which might protect against interest rate risk but often comes at the cost of lower potential returns during favorable conditions for capital gains on fixed income investments.