What are the tradeoffs between barbell, bullet, and ladder strategies for yield curve positioning, and when does each one outperform?

Barbell, bullet, and ladder strategies represent different ways to distribute a portfolio's cash flows along the maturity spectrum while targeting the same overall duration. They differ in convexity and perform differently when the yield curve changes shape rather than shifting in parallel.\n\nDefinitions:\n- Bullet: Concentrated in a single maturity range (e.g., all 7-10 year bonds)\n- Barbell: Split between short and long maturities (e.g., 2-year and 30-year)\n- Ladder: Evenly distributed across maturities\n\nKey Differences:\n\n| Property | Bullet | Barbell | Ladder |\n|---|---|---|---|\n| Duration | 7.0y | 7.0y | 7.0y |\n| Convexity | Low | High | Medium |\n| Cash flow dispersion | Low | High | Medium |\n| Yield (carry) | Higher | Lower | Middle |\n| Reinvestment risk | Concentrated | Diversified | Diversified |\n\n`mermaid\ngraph LR\n subgraph Barbell\n B1[\"2-year
50%\"] ~~~ B2[\"30-year
50%\"]\n end\n subgraph Bullet\n BU[\"8-year
100%\"]\n end\n subgraph Ladder\n L1[\"2y
20%\"] ~~~ L2[\"7y
20%\"] ~~~ L3[\"12y
20%\"] ~~~ L4[\"17y
20%\"] ~~~ L5[\"22y
20%\"]\n end\n`\n\nWhen Each Strategy Wins:\n\n1. Barbell outperforms when the curve flattens:\nValterra Capital holds a barbell (50% 2-year at 4.2%, 50% 30-year at 4.9%). Duration = 7.0y.\nIf the curve flattens (short rates rise 50 bps, long rates fall 30 bps):\n- 2-year loss: -1.9y x 0.50% = -0.95% on 50% weight = -0.475%\n- 30-year gain: -21.0y x (-0.30%) = +6.30% on 50% weight = +3.15%\n- Barbell total: +2.675%\n\nBullet (all 8-year bonds): -7.0y x ((0.50 - 0.30)/2)% approx = +0.70%\nBarbell wins by ~1.97% in a flattening.\n\n2. Bullet outperforms when the curve steepens:\nReverse the scenario and the bullet's concentrated maturity avoids the penalty on the long end.\n\n3. Bullet also wins through carry:\nThe barbell earns a blended yield of (4.2% + 4.9%)/2 = 4.55%, while the bullet earns 4.75% from the 8-year part of the curve (typically higher than the blend due to curvature). This carry advantage accrues daily.\n\nConvexity Advantage:\nThe barbell has higher convexity, meaning it benefits more from large parallel shifts in either direction. For small parallel shifts, the bullet's carry advantage dominates. Convexity matters most in volatile rate environments.\n\nPractice curve positioning trades in our CFA question bank.