A bond swap that involves swapping a short maturity bond with a longer maturity bond. This swap helps investors to move out on the yield curve towards longer maturities seeking higher yields or to position bond portfolios to withstand rate decreases/ drops. In cases where the yield curve is inverted (inverted yield curve), this swap is used to extend duration in order to take advantage of any expected pickup in bond prices.

Duration extension swaps are a common asset/ liability management strategy for banks and financial institutions that have very high asset sensitivities.