Barbell
A bond portfolio concentrated at short and long maturities with little in between, unlike a bullet clustered around one maturity. For the same duration it has more convexity, which pays when rates move a lot.
Where you will meet it
Barbell appears in 3 learning outcomes on the CFA syllabus. A few of them:
- Assess ways of funding one future liability with a bond portfolio
“The trap is thinking any duration-matched mix works equally: a barbell carries more structural risk than a bullet.”
- Construct a positioning strategy from forward rates when the manager expects the curve's level, slope or shape to differ from market pricing
“For shape, expecting intermediate yields to fall relative to the short and long ends favours a bullet; the opposite favours a barbell, often built as a duration-neutral butterfly.”
- Build a positioning strategy around an expected rise or fall in interest rate volatility
“If the manager expects realised volatility to exceed the implied volatility priced into options, adding convexity pays: buy options such as calls on bond futures or swaptions, or prefer option-free bonds and barbells to callable bonds and mortgage-backed securities, which are short volatility.”
See also
Practise it
Practise barbell until it is automatic: questions that explain every wrong option.
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