This is from Schweser self test (pg 119, book 3). The statement made is " A barbell strategy exploits a flattening of yield curve but can immunize a portfolio against interest rate risk in a manner similar to a bullet bond portfolio". Is this a correct statement? Answer provided is YES. I agree with the first portion i.e. as the yield curve flattens barbells do well since gain from long end (due to drop in yield, assuming you start with a upward curve) offsets loss from short end. I can’t understand the 2nd part. I thought barbells are not as good as bullets when it comes to immunization bcoz of higher dispersion of cash flow around the liability due date, irrespective of the shape of the yield curve. Can someone clarify? - BN
I guess "in a manner similar to " includes "not as good "
Since Barbells have a ST piece they have Higher Reinvestment Risk therefore they have Higher Immunization Risk with an Upward Sloping yield Curve…