barbell and flattening of yield curve

schweser says: a barbell strategy exploits a flattening of the yield curve but can immunize the duration of a portfolio just as a bullet bond could. the barbell invests in both a short term and long term bond. when the yield curve flattens, the decrease in the long term yield results in a stronger price increase than the decrease in the short term bond price because the long term bond has a longer duration. not fully understanding it…so what happens when the yield curve becomes steeper and what happens when you use bullet instead…can someone help? thx in advance!

Bonds with a longer duration will have a greater impact on price change, generally speaking. This also depends on how it is weighted, though I think the barbell is typically 50/50. When rates rise, the value of the long term bonds will decrease and the value of short term bonds increase. Given a $100 million portfolio: $50m in ST bonds with a duration of 1 $50m in LT bonds with a duration of 10 Short term rates decrease by 5% Long term rates increase by 5% The value of the ST bonds will increase by $2.5 million ($50*-.05*-1) The value of LT bonds will decrease by $25 million ($50*.05*-10) Let’s also say you have a bullet with a duration of 5. In this case it would be insensitive to changes in the steepening of the curve. Because the cash flows are centered around maturity, the bullet will be most sensitive to whatever happens to the 5 year rate.