Under what condition do barbells outperform bullets?

Barbells outperform bullets primarily when the yield curve flattens. In a barbell strategy, an investor holds bonds at the short and long ends of the maturity spectrum, while in a bullet strategy, the focus is on bonds that are concentrated around a specific maturity.

When the yield curve flattens, the interest rates on long-term bonds decrease relative to short-term bonds. This configuration benefits barbells because the long-term portion can experience price appreciation as investors seek the higher yields available at the shorter end of the curve. In contrast, bullets tend to be more vulnerable in this scenario as they lack the same degree of price responsiveness and may not experience the same upside from the changes in interest rates.

In summary, the dynamics of a flattening yield curve can enhance the performance of a barbell strategy compared to a bullet strategy, as the investor can capture the benefits of both ends of the curve more effectively.