Schweser note say: “If there is a large parallel and very near term upward shift in the yield curve, choose Barbell due to higher convexity that will produce the greatest cushioning of price decline”
I don’t udnerstand why. Wouldn’t choosing bullet be more rational because bullet is concentrated in mid term and near term yield curve won’t have an impact on bullet? While barbell has half of its exposure on short term durations?
I think key rate duration, instead of convexity, better explains the barbell choice.
I suppose you are describing an increasing and flattening yield curve scenario? Both barbell and bullet portfolios loses value in this case.
Barbell is generally preferred because total impact from mixed short and long-ends KRDs (as in a barbell) usually < that of mid-term only KRDs (as in a bullet).
With regards to your second paragraph, note that although a bullet is concentrated in the mid-term, short-end yield curve movements WILL still have an impact - recall spot rate valuation.
I read the whole Schweser reading but can’t find where it implies that short term rates can have impact on bullet. Very strange
The best way to understand this is to create two portfolios in Excel and see what happens.
Pick a 5-year bullet with, say, a 4.7-year modified duration and a combination of a 2-year and a 10-year with a 4.7-year modified duration and look at the price changes when you increase the YTM by 100 bp and when you decrease the yield by 100 bp.