What defines a duration neutral butterfly?

A duration neutral butterfly is a specific type of bond strategy used in fixed income investing that seeks to manage interest rate risk by balancing the durations of different components within the position. The strategy involves three components: two 'wings' and one 'body.'

In this context, both wings having a duration that matches the duration of the body ensures that the overall position is duration neutral. This means that any changes in interest rates will have a minimized impact on the overall value of the investment because the effects from the wings and the body will offset each other. As a result, the investor is less exposed to interest rate fluctuations, which is a critical aspect when managing bond portfolios.

By aligning the durations of the wings with that of the body, the strategy achieves its objective of being duration neutral, allowing the investor to potentially benefit from changes in yield curves without taking on additional risk from duration mismatches.