Weighing the Strength of a Barbell Investment Strategy

Posted: Aug 27, 2020 | Author: Frank Lugo

As in professional weightlifting, a good barbell strategy may offer considerable advantages for credit union investment portfolios.

Weighing the Strength of a Barbell Investment StrategyThe barbell is an investment strategy for fixed-income portfolios in which half the portfolio consists of long-term bonds and the other half is short-term bonds. It’s called a “barbell” because it’s heavily weighted with bonds at both ends of the maturity timeline. Few, if any, intermediate holdings are used, so the best way to strike balance is with duration and cash flow. Add long duration investments and match them with shorter duration investments.   

A barbell strategy for credit union portfolios has investment limitations and will be influenced by factors such as balance sheet composition, investment policy, loan-to-share ratio, liquidity and individual needs of the institution. A good starting point is a 50/50 mix of short-term (three years or less) and long-term (6-1/2 years or longer) bonds. Most credit union policies limit these investments to 10 years or less. This 50/50 approach can be adjusted as conditions warrant.

What investment options are credit unions using for their barbell strategy?

For short durations (three years or less):

  • Treasuries
  • Agency bullets and callables
  • Certificates of deposit
  • Seasoned 10-year mortgage-backed securities (MBS) with an average life of three years or less
  • Investment-grade bank notes with a rating of BBB or above

For longer durations (6-1/2 years to 10 years)

You can use the same investments listed above, but lengthen the terms. For example, seek 15- and 20-year MBS with an average life of 10 years or less, commercial mortgage-backed securities (CMBS) and collateralized mortgage obligations (CMOs). Add credit spread products, like investment-grade corporate bonds, taxable and tax-free municipals bonds.

When should a credit union implement a barbell strategy?  

The optimal time for a barbell strategy is when the gap widens between short- and long-term bond yields. With the six-month Treasury bill rate at 0.11 percent and the 10-year Treasury note bond at 0.63 percent, there is a 52-basis-point gap. The last time we saw a record high of this kind was September 2015, when the spread hit 213 basis points.

With interest rates at historical lows across the board, people may see a barbell strategy as difficult to implement in a steepening yield curve environment. This simply means that long-term bond yields are rising (and prices are falling) much faster than short-term bonds yields. When bonds on the long duration side decline in value, the investor may need to reinvest proceeds of the short side into low-yielding bonds. If the investor can hold longer duration bonds to maturity, the intervening fluctuations will not have a negative impact.

The opposite of a steepening curve is a flattening yield curve, where yields on the short duration bonds rise faster than the yields on their longer-term counterparts. This situation is much more favorable for the barbell strategy.

Starting your barbell.

The short-term duration side can begin with a simple ladder, with buckets in overnight funds of six months to three years. Buckets can be quarterly, semi-annual or annual, with maturities of one, two or three years. This short-term duration barbell is actively managed using callable bonds and bullet bonds, plus seasoned 10-year MBS. As time goes on, you will have maturities, prepays, and called bonds coming in frequently, especially when rates decline.

Risk analyst and “Black Swan” author Nassim Nicholas Taleb says a key component to this strategy is to proficiently manage the short duration side of the barbell. This will allow you to add long duration bonds to the other side. As the markets improve and credit spread widens, you can add other credit spread products to increase yields and returns.

Implementing this barbell strategy can give you a time-tested plan and help eliminate some speculation as you manage the short-term side of the barbell.

Catalyst Corporate’s  Brokerage Services Team has years of service dedicated to the credit union and investment industries, and we work diligently to find securities that meet the unique needs of each credit union we support. Contact our dedicated professionals for a review and discussion of your portfolio and available investment options.

All securities are offered through CU Investment Solutions, LLC. The home office is located at 8500 W 110th St, Suite 650, Overland Park, KS 66210. CU Investment Solutions, LLC registered with the Securities and Exchange Commission (SEC) as a broker-dealer under the Securities Exchange Act of 1934.  CU Investment Solutions, LLC is registered in the state of Kansas as an investment advisor. Member of FINRA and SIPC. All investments carry risk; please speak with your representative to gain a full understanding of said risks. Securities offered are not insured by the FDIC or NCUSIF and may lose value. All opinions, prices and yields are subject to change without notice.


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