Barbell Bond Portfolio

An investment portfolio with 50% short-term bonds and 50% long-term bonds

What is a Barbell Bond Portfolio?

A barbell bond portfolio is an investment portfolio that comprises both short-term and long-term bonds wherein one half of the portfolio consists of short-term bonds and the other half consists of long-term bonds.

 

Barbell Bond Portfolio

 

The investment portfolio is called the barbell bond portfolio because it can be graphically described using a barbell with short-term bonds on one side and long-term bonds on the other. The short-term bonds generally have a maturity period of less than or equal to five years, while the long-term bonds generally have a maturity period of 10 years or longer.

 

 

Summary:

  • A barbell bond portfolio is an investment portfolio that comprises both short-term and long-term bonds wherein one half of the portfolio consists of short-term bonds, and the other half consists of long-term bonds.
  • Short-term bonds generally have a maturity period of up to five years, while long-term bonds have a maturity period of 10 years or longer.
  • The key behind a barbell bond investing strategy is close attention to the short-term bonds in a rising yield curve environment. As the short-term bonds keep maturing, they are reinvested into new short-term bonds, increasing the overall value of the investments and the value of the portfolio.

 

How Does the Barbell Bond Investing Strategy Work?

The barbell bond investing strategy, simply referred to as the barbell strategy, involves investing in two distinct kinds of bonds – short-term and long-term. The strategy aims at benefiting from both extremes to make a profit. The key in a barbell bond investing strategy is close attention to the short-term bonds in a rising yield curve environment.

As the short-term bonds keep maturing, they are reinvested into new short-term bonds, increasing the overall value of the investments and increasing the value of the portfolio. Because of the constant focus on short-term bonds, this is an active strategy, implying that it needs active management to adequately roll short-term bonds into new issues upon maturity.

Another important aspect of the barbell portfolio is timing. The best time to invest using a barbell strategy is when the yield curve is flattening. A flat yield curve implies a very small variation or disparity in the yield between the short-term and long-term bonds. Therefore, the variance or spread between bonds is very small, which works best for the barbell strategy.

On the contrary, a steepening yield curve is detrimental to a barbell strategy since long-term yields increase faster and at an increasing rate as opposed to short-term yields. It results in a decline in the overall value of long-term bonds, thus defeating the entire purpose of the barbell strategy. Therefore, the best time to invest using a barbell strategy is when the yield curve is flattening.

 

Barbell Bond Portfolio Investment – Features

 

1. Two types of bonds

The barbell bond portfolio only contains two types of bonds – either short-term or long-term bonds. The bonds have similar maturity timelines. There are no bonds with an intermediary maturity period.

 

2. Risk level

The exposure to risk using a barbell strategy primarily lies in the long-term bonds of the portfolio. The long-term bonds are untouched up to maturity and are much more volatile than short-term bonds. The risk comes in the form of potential capital losses on account of unfavorable market conditions.

 

3. Active strategy

The barbell investing strategy is an active investment strategy. It requires active monitoring of the short-term bonds since the essence of the strategy is to roll short-term bonds into new ones upon maturity. Without active management, this investment portfolio will only end up with long-term bonds, defeating the very purpose of the barbell strategy.

 

4. Higher liquidity

Since this investing strategy involves rolling short-term bonds into new issues upon maturity, it offers higher flexibility and liquidity compared to other investing strategies.

 

Related Readings

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Investment Portfolio
  • Bonds
  • Volatility
  • Term to Maturity

Corporate Finance Training

Advance your career in investment banking, private equity, FP&A, treasury, corporate development and other areas of corporate finance.

Enroll in CFI’s Finance Courses

to take your career to the next level! Learn step-by-step from professional Wall Street instructors today.