A company expects a 25 basis point decline in short-term rates and a 100 basis point increase in long-term rates. A short duration bullet strategy is most appropriate to take advantage of this forecast. The bullet will outperform the barbell because the barbell will experience lower reinvestment rates longer than the bullet and the barbell will also suffer a large capital loss on the long-term position. I did not follow the reasoning in the above. Can anybody please throw some light? Thanks!!
For a barbell the longer term bonds have a higher duration then the shorter termer bonds so the decrease in the longer term bonds will be greater then the gain on the shorter term bonds if short term rates decline and long term rates increase.
it goes the other way also, if ST rates increase and long term rates decrease you can undertake a long duration bullet or a barbell. bullet will outperform bec it does not have to suffer the decrease in value as a barbell does bec of the short-end part.