What is Barbell Strategy?

Central Government opted for what is known in financial markets as a “barbell” strategy – i.e. hedge first for the worst-possible outcome while progressing step-by step with a Bayesian updating of information.

The barbell strategy involves investors purchasing short-term and long-term bonds, but not intermediate-term bonds. The particular distribution on the two extreme ends of the maturity timeline creates a barbell shape. The strategy offers investors exposure to high yielding bonds with limited risk.

The first advantage of the strategy is that it enables investors to have access to higher yield long-term bonds. The second advantage is that it decreases risk. The strategy lowers risk as short-term and long-term bonds’ returns tend to be negatively correlated. So, when short-term bonds do well, the long-term bonds tend to struggle and vice versa. Thus, by holding bonds with different maturities, investors have less downside risk.