In the CFA curriculum (Reading 21, Page 80) a front end bullet is explained as a bullet structure that has a great appeal for investors who pursue a “barbell strategy” in which the short and the long end of the barbell are US Trasury securities.
Could anyone kindly explain the statement?
I will very much appreciate comments !
This is just discussing the bond strucuture and how participants in the markets demand these structures. A bullet is a non callable, non sinking, traditional bond. A “Front End Bullet” refers to short term bonds, 1-5 year bonds that have the bullet structure (non call, non sink, fixed coupon). Investors who pursue a “Barbell” strategy will be overweight the short end and overweight the long end of the yield curve. Barbell Strategies usually purchase Bullet structures in the front end.
And in the back end.
Thank you for the detailed explanation. I thought however that “Bullet” and “Barbell” are two different (opposite) strategies.
“Bullet” is a method under which an investor chooses a date (e.g., bonds set to mature seven years from now) and sticks exclusively with it.
“Barbell”, on the other hand, is both hyperconservative and hyperaggressive (e.g., extremely save investments + highly volatile investments).
I think they mean, the front end is composed of ‘corporate bullets’, and the long end is in TSY’s.
The curriculum says: “Front-end bullet (securities with 1- to 5 year maturities) have great appeal for investors who pursue barbell strategy in which both the short and the long end of the barbell are US Treasuries.” Conceptually, Treasury notes and Treasury bonds are coupon paying securities, and therefore cannot be classified as “bullets”. The only Treasuries which do not pay regular coupon are Treasury bills with maturity of one year or less. If they were ment in the textbook, then the first statement related to maturity would have been incorrect.