You could be buying defensive stocks like consumer staples, which are stable through economic expansions and busts, but also cyclical stocks like oil, which are highly economically sensitive.
In first quarter, when the pandemic struck, the Federal Reserve had to drastically lower interest rates in order to enable people and businesses liquidity in order to rebound after lockdowns end.
Well, that means stock prices were rising in part because safe treasury bond prices were rising interest rates fall as prices rise. Plus, many investors were cautious on the speed of the economic recovery, so while they wanted to be exposed to stocks, they wanted downside protection by holding treasures, whose price was bound to remain somewhat elevated anyway, as the Fed keeps rates low.
Recently, Bank of America global Research has pointed out that many investors are using a growth versus value barbell strategy. Short-term securities also provide liquidity for the investor and flexibility to deal with emergencies since they mature frequently. The barbell investment strategy still has some interest rate risk even though the investor is holding long-term bonds with higher yields than the shorter maturities. If those long-term bonds were purchased when yields were low, and rates rise afterward, the investor is stuck with 10 to year bonds at yields much lower than the market.
The investor must hope that the bond yields will be comparable to the market over the long term. Alternatively, they may realize the loss , sell the lower-yielding bond, and buy a replacement paying the higher yield.
Also, since the barbell strategy does not invest in medium-term bonds with intermediate maturities of five to 10 years, investors might miss out if rates are higher for those maturities. For example, investors would be holding two-year and year bonds while the five-year or seven-year bonds might be paying higher yields.
All bonds have inflationary risks. Inflation is an economic concept that measures the rate at which the price level of a basket of standard goods and services increases over a specific period. While it is possible to find variable-rate bonds, for the most part, they are fixed-rate securities. Fixed-rate bonds might not keep up with inflation. Finally, investors also face reinvestment risk which happens when market interest rates are below what they were earning on their debt holdings.
Assume that market sentiment has become increasingly positive in the short term and it is likely the market is at the beginning of a broad rally. The investments at the aggressive—equity—end of the barbell perform well. As the rally proceeds and the market risk rises, the investor can realize their gains and trim exposure to the high-risk side of the barbell. Portfolio Management. Corporate Bonds. Fixed Income Essentials. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.
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These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Investing Portfolio Management. What Is the Barbell Strategy? Key Takeaways The barbell strategy advocates investing in a mix of high-risk and no-risk assets while ignoring the mid-range of mildly risky assets.
When applied to fixed income investing, the barbell strategy advises pairing short term bonds with long-term bonds. The result gives the investor a cushion of long-term bonds in case yields fall, and a chance to do better if short-term yields rise.
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