Why does a barbell beat a bullet when duration is the same?
I understand how to duration-match two bond portfolios, but I keep seeing examples where the barbell still outperforms the bullet. If duration is matched, what exactly is driving the difference?
Matching duration only aligns first-order interest-rate sensitivity. It does not guarantee the same second-order sensitivity, which is convexity. A barbell spreads cash flows across shorter and longer maturities, so it often has more convexity than an intermediate bullet with the same duration.
That means a barbell usually loses less when yields rise and gains more when yields fall by the same amount. The difference is not because duration was wrong. It is because duration was incomplete.
On the exam, if the vignette compares a barbell and a bullet with similar duration, the next concept to test is usually convexity, not a recalculation of duration.
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