what is a credit barbell strategy?
FML
It’s a strategy where you are long a short term bond and an intermediate to long term bond. It will have more convexity than a similar one bond investment with the same effective duration.
both credit curves, both term structure and credit structure, are almost always positively sloped. in an effort to moderate portfolio risk, many portfolio managers take credit risk in short and intermediate maturities, and to substitute less-risky government securities in long-duration portfolio buckets. this strategy is called credit barbell strategy.
Could someone please explain what does the above sentence in bold means? I read from Kaplan that A barbell is a portfolio that contains short- and long-term bonds. As opposed to using short-term Treasuries, corporate securities are used at the front end of the yield curve with long-term Treasuries at the long end of the yield curve.
As such, I am rather confused by the “short and intermediate maturities” mentioned in the quoted phrase.
Any help please? Thank you.
You get more yield and convexity by using credit bonds on the short duration end and then to counter some of the additional risk they use treasuries in longer term to balance/offset it. It’s just to get some extra yield, hopefully. If you did it the opposite then you have too much risk in the long duration end.
I’m not the bond guy so hopefully s2000magician will chime n but what helps me with these questions is to visualize the graph with bond price on y axis and yield on the x axis. As yield moves down price increases at an increasing rate. As yields move up bind.prices move down.at a decreasing rate, assuming no contingencies such as callable or putable features