Tim Olson
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2.1 KiB
2.1 KiB
description, tags
| description | tags | ||||
|---|---|---|---|---|---|
| A bullet portfolio concentrates all bond holdings at a single target maturity, used to express a directional view on interest rates at a specific point on the yield curve. |
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Bullets
Section: 5.2 | Asset Class: Fixed Income | Type: Duration / Directional
Overview
In a bullet portfolio all bonds share the same maturity date T, targeting a specific segment of the yield curve. The strategy expresses a view on the direction of interest rates at that maturity. Bonds are typically purchased over time to mitigate timing risk from rate fluctuations.
Construction / Mechanics
- Select a target maturity T based on the trader's interest rate outlook.
- Purchase bonds of that maturity, potentially accumulating positions over time.
- Hold to maturity or until the rate view is realized.
Purchasing over time mitigates interest rate risk: if rates rise, later purchases capture higher yields; if rates fall, earlier purchases lock in higher yields.
Payoff / Return Profile
- Rates expected to fall (bond prices rise): pick a longer maturity — longer bonds gain more in price from a given yield decline (higher duration).
- Rates expected to rise (bond prices fall): pick a shorter maturity — shorter bonds lose less.
- Uncertain outlook: diversify across maturities (barbell or ladder preferred).
Key Parameters / Signals
- Target maturity T: the single maturity determining duration exposure
- Modified duration: scales with T; determines price sensitivity to rate changes
- Interest rate forecast: the primary signal driving maturity selection
Variations
- Building the portfolio gradually over time to average in across different rate environments.
Notes
- Concentrating at one maturity creates pure duration exposure with no convexity advantage.
- Compared to a barbell with the same duration, a bullet has lower convexity, meaning it is more exposed to parallel yield curve shifts.
- Suitable when the trader has a strong directional view on a specific maturity segment.