Duration and Stock-Bond Allocation

Interesting discussion from John Hussman about changes in "duration" and the optimal allocation between stocks and bonds in a portfolio. Duration for bonds is the sensitivity of the bond price to a change in interest rates. Bonds with distant maturities are much more sensitive than short-term bonds and therefore more volatile. Hussman also talks about a duration for stocks which is the sensitivity of stock prices to changes in the discount rate applied by investors to company's cash flows. He argues that this is equal to the reciprocal of the dividend yield.

Anyway, the lower the duration of an asset the more an investor with a given time horizon can allocate to it. Given the increase in stock yields and the fall in US Treasury yields recently investors should allocate more to stocks and less to treasuries. This is an alternative argument for valuation based market timing.

BTW I checked the CREF Bond Market Fund's holdings and less than 10% is in long-term treasuries. So there is no reason to dump that fund based on the high prices of long-term U.S. bonds.