Bullet and Barbell Strategies

Bullet Strategy

maturities concentrated around one point on the yield curve

Barbell Strategy

maturities of securities are concentrated at two extreme maturities

Ladder Strategy

Equal amounts of securities at each maturity

Because you don’t want CDs to all mature at the same year

roll it over.

Dollar duration for barbell portfolio

How do different bond portfolios perform when interest rates change?

Depends on how much rates change and how the yield curve shifts.

What happens to the relative performance between the bullet and barbell strategies when the rates change

Parallel shift in the yield curve

yield changes

yield curve flattens

For a parallel shift in the yield curve, bullet portfolio outperforms the barbell portfolio when yield on C falls by less than 100 bases points or rises by less than 125 basis points.

For the nonparallel flattening of the yield curve, the barbell outperforms the bullet for any yield change.

Unless the interest rates change a lot, you don’t benefit from that convexity.

For a nonparallel steepening of the yield curve the bullet portfolio outperforms the barbell as long as the yield on C doesn’t rise by more than 250 basis points or fall by more than 325 basis points.

Key Point - duration and convexity tells us little about performance over some investment horizon.