What is a primary reason a barbell strategy tends to outperform a bullet strategy?

A barbell strategy involves investing in short-term and long-term bonds while avoiding intermediate maturities. This creates a structure that tends to provide greater convexity compared to a bullet strategy, which focuses on bonds with a single maturity point.

Greater convexity is beneficial because it indicates that as interest rates change, the price sensitivity of the barbell strategy will react more favorably compared to a bullet strategy. When rates fall, a barbell position benefits more from the price appreciation of long-duration bonds, while short-term bonds provide liquidity and safety against interest rate increases. This duality allows the investor to capture upside potential in a declining interest rate environment while maintaining a steadiness in a rising rate environment.

Overall, the convexity characteristic of the barbell strategy often results in enhanced returns relative to the bullet strategy during fluctuating interest rate environments. Therefore, the performance advantage of the barbell strategy primarily stems from this increased convexity, leading to potentially higher risk-adjusted returns.