Hey,
Is a barbell strategy really appropriate during times of a trough?
A Barbell involves buying short term and long term bonds, but avoiding medium term ones.
Why would one buy long term bonds when the economy is at a trough? Interest rates are going to eventually rise, and those long term bonds are going to then decline in value.
Wouldn’t it be better to only stick to short term bonds?
Regards,
So, the yield curves will flatten (assuming it is the flattening yield curve from an upward sloping) as the short rates increase and long rates decline. Then why would you not invest in “Barbell strategy”?
The barbell strategy would be appropriate for this scenario. Because even though the short term bonds decrease in price but the long terms bond’s gain will compensate for that as the long term bonds have higher duration.
Typically speaking, long term maturities seldom move with changes in Fed funds rate. They are influenced by macro factors such as inflation expectations or economic growths.
Pyng’s right.
In addition @sharadkapoor, you’d have to consider the trade-off between capital loss risk (probability of interest rates rising) and reinvestment risk (when you invest in short term bonds).