Hi, if we start with an inverted yield curve (with a curvature like a “U”) the Barebell strategy will outperform if the curvature is decreasing (e.g. the body-central part of the yiled curve goes up and the short positions will gain).
The text book is rather saying that less curvature will always have a negative impact to the barebell strategy.
Maybe I’m wrong in how I think curvature looks like…
That is an interesting thought.
In the inverted yield curve as you have mentioned, a barbell strategy might have little to do with how the middle yield change right? So it might actually be immune to the rising yield, and “outperform” relative to a bullet maybe.
In that case, it is less curve for sure.
Thank you biwa.
yes i was wrong saying the below:
because there are no positions. On what we are aligned is that barebell will outperform a bullet in the inverted scenario.
An example:
Base scenario:
1y:5%
5y:2%
10y:7%
Scenario 1:
1y:5%
5y:5%
10y:7%
In this case Bullet 5y will lose money, Barebell will mantain. Barebell better than Bullet
Scenario 2:
1y:2%
5y:2%
10y:2%
In this case Bullet 5y will lose money, Barebell will gain on the 10y. Barebell better than Bullet
Pls correct (anyone) if I’m wrong
Thx!
Brushing up on this concept myself. Looks you are correct that a Barbell would be preferable in both scenarios.