Barbell vs. Bullet

Barbell and bullet are the two fundamental ways to structure a fixed-income portfolio along the maturity spectrum while maintaining the same overall duration.

A barbell concentrates holdings in the short and long ends of the curve (e.g., 2-year and 30-year bonds). A bullet concentrates holdings in a single intermediate maturity (e.g., 10-year bonds). Both can be constructed to have the same duration, but they respond differently to curve movements.

Key differences:

• Convexity: the barbell has higher convexity than the bullet at the same duration, because convexity increases with the square of maturity and the 30-year wing contributes disproportionately
• Carry: the bullet typically has higher carry because the intermediate sector often sits on the steepest part of the curve
• Curve exposure: the barbell benefits from a flattening curve (the wings outperform the belly), while the bullet benefits from a steepening curve

The Salomon Brothers yield curve primer (Parts 6 and 7) provides the canonical framework for barbell-bullet analysis:

• In a stable rate environment, the bullet outperforms due to its carry advantage
• In a volatile or rallying environment, the barbell outperforms due to its convexity advantage
• The breakeven is the level of yield volatility at which the convexity advantage offsets the carry disadvantage

A barbell-bullet trade — long the barbell, short the bullet (or vice versa) — is equivalent to a butterfly spread and isolates exposure to yield curve curvature.