[Fixed Income]when long term interest go up, FI portfolios experience the lower reinvestment rate? why?

“short rates decline while long rates go up. Both the barbell and bullet portfolios would realize a decline of the portfolio value at the end of the investment horizon below the target investment value, because they would experience a capital loss in addition to lower reinvestment rates.” from CFA text book.

Shouldn’t the coupon be invested at higher rate when long term interest rate go higher? Please clarify, why they say lower reinvement rate?

It sounds as though they’re reinvesting the coupons for one coupon period, then rolling them over.

The coupons will ultimately be reinvested for the remaining time to maturity. Why they don’t assume that you reinvest them for that whole period and be done with it is not clear; they should have been clearer about how they’re reinvesting the coupons.

Welcome to the world of CFA.

In my opinion, since short term rate are expected to decline, you will be force to reinvent at lower rate no matter what strategy you are using bullets or barbell. The only difference between barbell and bullets bonds strategies is the date of coupon payments. In bullets, payments are around the horizon date ( maturity ) while in barbell the coupon payments are spread along the time horizon ( dispersion of cash flow is wider for barbell) . So both strategy will fall short at maturity because you will recieve the par value of the bond plus coupon plus lower reinvested return on coupon which you have assumed to be higher or at least equal the YTM at issuance when you first immunized your liability. In this case, the bullet will outperform barbell but both will fall short at maturity. If short rate increased while long rate decreased, then barbell portfolio should outperform bullet.

I’ve noted to myself p. 33 ad 4.1.1.3 Determining the Target Return (second paragraph) which is the explanation of the CFAI at upward and downward-sloping curves. In short, the upward curve (declining short-term and rising long-term rates) is always translating to a loss in value because the target return falls short of the YTM. So this makes sense:

Not fully clear to me as well what the CFAI is trying to say tho…