What does "buying convexity" allow an investor to do?

Buying convexity allows an investor to alter the convexity of a bond or bond portfolio without changing its duration. Convexity refers to the curvature in the relationship between bond prices and yields. An investor may seek to increase the convexity of their position because it can enhance the portfolio's performance in fluctuating interest rate environments.

When an investor buys convexity, they are typically engaging in strategies that might involve options or other derivatives that provide exposure to the curvature of the price-yield relationship. This position can help mitigate losses during periods of rising interest rates, as higher convexity tends to lead to a more favorable price change when yields move.

The ability to adjust convexity independently of duration is crucial for managing interest rate risk while maintaining the desired sensitivity to interest rate changes. This capability enables investors to optimize their bond portfolios according to market conditions and their specific investment objectives.

In summary, buying convexity equips an investor with tools to enhance their position's sensitivity to interest rate movements without altering the overall duration risk profile, which is a key consideration for fixed-income management.