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Keith Banks endorses the Barbell investment strategy
At Market Realist, we’ve been discussing the flattening yield curve, along with the possibility of its inversion as the Fed hikes the rates. Keith Banks, the president of Bank of America’s (BAC) wealth management business, also recognizes this phenomenon. Banks talked about protecting bond returns as the yield curve flattens. Banks suggests the Barbell strategy.
For protecting your bond returns as the yield curve flattens—with the Fed raising the rates, Banks suggests using a Barbell strategy. He said that “We want to be barbelled.”
Barbell strategy
The barbell strategy is frequently used in designing bond (BND) (AGG) portfolios. The strategy is designed to take advantage of rising interest rates. Under the barbell strategy, the portfolio consists of half long-term, 10–30 years (TLT), and half short-term, up to three years, (SHY) bonds with a few in between. The investor is usually underweight at the belly of the curve at 5–7 years.
How does it work?
When short-term interest rates are expected to rise, this strategy works well.
At the short end, you continue to reinvest as rates rise. At the long end, you can lock in the higher rates. You protect the return on your investment. You benefit from both of them. You benefit from the rising short-term rates and the higher yields payable on longer-term bonds as the duration increases.
To learn more, read Why barbell bond portfolios can outperform when rates rise.
Suitability
This strategy isn’t suitable for passive investors. Investing heavily in short-term bonds implies that you would rapidly be approaching maturity dates. You will need to keep re-investing the proceeds in the appropriate instruments. As a result, you need to be actively managing your portfolio to apply this strategy effectively.
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