Bullet vs barbell strategy — which outperforms under which curve scenarios?

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AcadiFi · Accepted Answer

Bullet and barbell can be constructed to have the same duration — the difference is convexity and vulnerability to different curve movements.

**Bullet**: Concentrated at one maturity, e.g., 100% in 10-year bonds. Lower convexity because cash flows clustered.

**Barbell**: Split between short and long, e.g., 50% 2-year + 50% 20-year, duration-matched to bullet. Higher convexity because cash flows spread.

**Scenario analysis (same starting duration)**:

**1. Parallel shift DOWN (yields fall uniformly)**: Barbell outperforms. Convexity advantage kicks in — barbell gains more for the same duration.

**2. Parallel shift UP (yields rise uniformly)**: Barbell still outperforms due to convexity cushion (loses less than bullet).

**3. Steepening (long rates rise more than short)**: Bullet typically outperforms. Barbell has long-end exposure that suffers.

**4. Flattening (long rates fall more than short)**: Barbell outperforms. Long-end rally helps the long leg.

**5. Curvature (humped curve)**: If belly cheapens (rises more than wings), barbell wins. If belly richens, bullet wins.

**6. Stable curve (just roll)**: Both earn roll-down from their respective positions. Depends on local steepness.

**Cost trade-off**: Barbell's convexity advantage isn't free — the barbell typically has lower YIELD than the bullet with same duration (because the curve is humped — belly is richer, wings cheaper). You pay for convexity.

Worked example: Crescenda Asset Management has $100M, targets 7-year duration. Bullet: 100% in 7Y Treasury at 4.40%. Barbell: 55% in 2Y at 3.85% + 45% in 15Y at 4.75%, duration ≈ 7. Weighted barbell yield: 55% × 3.85% + 45% × 4.75% = 4.26% vs bullet 4.40%. Barbell gives up 14bps of yield but gains ~0.3 additional convexity.

**Rule of thumb**: Barbell wins on large parallel moves; bullet wins on stable curves or steepening.

Bullet vs barbell strategy — which outperforms under which curve scenarios?

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