Bullet, barbell, and ladder: best and worst cases
| Strategy | Structure | Best When | Risk |
|---|---|---|---|
| Bullet | Concentrate around one maturity (e.g., all 5-year) | Curve flattens at your maturity | Poor if curve steepens |
| Barbell | Split between short and long (e.g., 2-year + 10-year) | Curve flattens (long outperforms), volatile rates | Poor if curve steepens |
| Ladder | Equal amounts at each maturity (1, 3, 5, 7, 10) | Uncertainty about rate direction | Doesn’t outperform in any scenario |
Why barbells beat bullets on a flattening
Barbells have more convexity than bullets at the same duration, which means they outperform in volatile rate environments and when the curve flattens. But bullets outperform when the curve steepens, because they avoid the long end - the part of the curve that sells off hardest in a steepening.
Match a strategy to today's curve shape
Check the current yield curve shape in the Macro section. Is it steep, flat, or inverted? A flat/inverted curve favors barbells; a steep curve favors bullets.
Which strategy wins on a flat curve
The yield curve is currently very flat (2-year and 10-year yields are nearly equal). Which strategy benefits most?
Why ladders are the right answer under uncertainty
Does matched duration make bullet and barbell equal
Yield curve is flat (2Y yield = 10Y yield = 4.5%). You can either build a 'bullet' portfolio (all 7Y bonds) or a 'barbell' (50% 2Y + 50% 30Y, duration-matched). What's the difference?
Check your understanding
Sit with the ideas.
The yield curve is steep (2-year at 3%, 10-year at 5%). You believe the Fed will raise short-term rates, flattening the curve. Which strategy should you use?
Why: