Barbells

CFA Level III Fixed Income
#1

State and justify the optimal strategy if the manager expects an immediate flattening of the curve with short rates increasing 50 bp, no change in intermediate rates, and long rates decreasing 50 bp.

I do not get the answer:

“The barbell because it has the most exposure to long duration assets where rates will decrease. This will give it the largest value gain.”

Why would the barbell be the best, why would this give the largest value gain?

#2

Flattening means long rates dropping and short rates rising… So your long bonds increase in value the most. That is good news for barbells.

#3

put differently, the gain in the long duration bonds is greater than the drop in value of the short duration bonds, because of the greater sensitivity of the longer duration bonds to interest rate changes