Where do cash flows in duration matching portfolios primarily come from?

In duration matching portfolios, cash flows primarily come from coupon and principal repayments of bonds. The strategy behind duration matching involves aligning the cash inflow from a fixed-income portfolio to the timing of liabilities or cash outflows the investor expects to face in the future. This is particularly relevant for managing interest rate risk, as the cash flows from bonds that pay periodic coupons and return principal at maturity provide predictable cash flow streams.

When constructing a duration matching portfolio, the focus is on bonds because they generate these fixed cash flows through regular coupon payments and at maturity, the return of principal, aligning closely with the timing of the investor's liabilities. Other investment types, such as real estate or equities, do not provide the same regularity or certainty in cash flows, making them less suitable for duration matching strategies.

Thus, the characteristics of bonds and the nature of their cash returns make coupon and principal repayments the primary sources of cash flows in portfolios designed around the concept of duration matching.