Interest Rate Risk Management in Fixed Income Portfolios

As a fixed income portfolio manager, you have been tasked with assessing the interest rate risk of a diversified bond portfolio valued at $50 million, consisting of both government and corporate bonds across various maturities. Recent market developments have introduced significant volatility, leading to an unexpected premium on longer-dated bonds.

In your response, evaluate the current interest rate risk exposure of the portfolio using modified duration and convexity measures. Discuss the implications of these measures on the portfolio's performance in different interest rate environments. Propose strategies to mitigate the interest rate risk identified and to enhance the portfolio's overall risk-adjusted returns.