check readings volume 3 P349, the example given here is similar to the question 29 in the sample exam. My question is: if short rates go up while long rates decline, what will the situation be? Choose Barbell, because the capital gain is bigger. Is that correct?
correct, as gain on longer duration bonds will ofset loss on shorter duration bonds
^Just to add, because long bond is more rate sensetative than short bond.
What happens if I just choose a long maturity bullet? I.e. if my expectation is for long term rates to go down irrespective of what short term does.
I think about this Q29 and have a question. When LT rates is up and ST rates is down, is the best strategy to short a barbell then? - sticky
I think we could use both barbell strategy or bullet on the long end strategy.
When I was doing this question, I said well of course you should short a barbell, provided the situation. (Am I correct?) And then I saw this choice with “short” and “barbell” and I just picked that, never realizing that it was “short duration barbell”. @_@ So back to the shorting of a (long duration) barbell, am I correct?
If ST rates are inceasing and LT Rates are decreasing, I’m going Long a Bullet b/c LT rates are decreasing and LT bullet will have a Higher Duration and see a higher upside than barbell that’s being effected by both sides of the YC.
The best strategy is to long a bullet at the long end. The second best is to long a barbell. That’s what my fixed income fund manager uses.
sticky Wrote: ------------------------------------------------------- > I think about this Q29 and have a question. > > When LT rates is up and ST rates is down, is the > best strategy to short a barbell then? > > - sticky As part of your immunization strategy, aren’t you exposing yourself to risk here? I see immunization as an ALM issue which is best tackled with a long-only strategy, not a long-short.
Thanks for posting this Q. I was looking for this answer, since the text book has ST down, LT up.
OK, IIRC, the bullet at the long end will benefit most (or suffer least) from a twist in the yield curve from normal to inverted (it may still suffer a little if the twist happens such that all rates rise, but less on the long end). However, a bullet at the long end will also have a long duration. If your portfolio needs to have a specific duration, and the long-end bullet is too long, the barbell strategy will allow you to benefit from the twist and still keep the overall duration set to what it needs to be.
deardeng Wrote: ------------------------------------------------------- > The best strategy is to long a bullet at the long > end. The second best is to long a barbell. That’s > what my fixed income fund manager uses. agree. But then I am confused … I remember there is a situation that you should “go for barbell instead of bullet” … what is that? (I thought it was LT drop and ST rise but it seems my memory is wrong)
A barbell would be better for hedging a MBS vs a Bullett. Think of the 2Y and 10Y Barbell for a MBS 2-bond hedge…