What kind of strategy is recommended when the yield curve is expected to flatten?

When the yield curve is expected to flatten, a bullet strategy is recommended because it focuses on investing in bonds with maturities that are concentrated around a particular point on the yield curve. This approach allows an investor to take advantage of the expected changes in interest rates during a flattening of the yield curve.

In a flattening yield curve environment, the yields on short- and long-term bonds converge. A bullet strategy typically involves holding bonds that mature in the intermediate range, where the interest rate changes may be most favorable. By concentrating investments in a specific maturity range, the investor is better positioned to capture yield when yields on bonds in that range do not rise as sharply as yields on either end of the curve.

Using a barbell strategy, which involves investing in both short- and long-term bonds, may be less effective in a flattening curve scenario as it diversifies exposure across maturities, potentially missing out on the yield benefits of targeting intermediate-term bonds exclusively. Investing in short-term bonds alone may not maximize returns during this period, while adopting a long bond position could expose the investor to significant interest rate risk if rates rise unexpectedly.