Barbell vs Bullet (Fabozzi's Take)

This is taken from Fabozzi’s Handbook, 7th ed (Chapter 47, P 1096) “Because the duration calculation assumes a parallel shift in the yield curve, the barbell structure incorporates the greatest amount of yield-curve risk by concentrating cash flows on both ends of the curve. If the yield curve is positive or inverted, the barbell structure will violate the assumption of a flat curve more than the even ladder or bullet structure. On the other hand, the bullet structure, by concentrating cash flows at a single maturity point, incorproates a flat slope over the relevant range on the yield curve. For single-period immunization, a bullet maturity structure with tight cash flows around the liability date generally is preferred to an even ladder or barbelled portfolio because of the reduced risk exposure to the yield curve becoming steeper or twisting. In fact, to eliminate the risk of pathologic shifts in yields, the investors could tighten the cash flows still further & purchase a zero-coupon bond to cash-flow-match the single-period liability. Short of that, a bullet structure is less risky, and the barbell is the most risky.” CONCLUSION: Bullet performs better than Barbell in every situation (steep, inverted, twist). If flat, you can go with either.

CONCLUSION: Bullet performs better than Barbell in every situation (steep, inverted, twist). If flat, you can go with either. cant be true, if both short and long rates increase your screwed

Isn’t that a parallel shift to the curve, when the duration of assets & liabilities will change by same percentage?

Hmm… for a single liability payment at a given point in time (what they mean by single period immunization), a bullet structure would definitely be safer, since it is closer to a cash flow match. I think you’d only want to do a Barbell if you thought long term rates would fall or the yield curve would flatten and you’d like to cash in on that to improve your surplus. From a risk point of view it’s more risk, but if you’re good at modeling the yield curve, it might get you some money. If the yield curve bows in or out (long and short ends move in opposite directions or just more than the liability maturity), then you’ll get a performance difference between barbell and bullet. Ladder is just the middle option, and I gather that ladders are mostly used for maintaining periodic liquidity.

abacus Wrote: ------------------------------------------------------- > Isn’t that a parallel shift to the curve, when the > duration of assets & liabilities will change by > same percentage? could be a twist where in they dont increase by the same %

Fabozzi says that bullet outperforms barbell is all scenarios; I kinda of like that logic. It’s simple to remember when it comes to single-period immunizations.