When do bullets outperform barbells in bond strategies?

Bullets tend to outperform barbells in bond strategies when the yield curve steepens. This is because bullet portfolios consist of bonds that mature at a single point in time, while barbell portfolios hold bonds with short- and long-term maturities.

When the yield curve steepens, long-term interest rates increase relative to short-term rates. In this scenario, the price of long-term bonds in a barbell portfolio would decline more significantly than the price of the shorter-term bonds. Conversely, bullet strategies that concentrate investments at a single maturity will benefit as this maturity typically receives a larger portion of the yield curve's steepening effect, while managing interest rate risk effectively.

In summary, a steepening yield curve tends to favor bullet strategies due to their focus on a single maturity, thus creating a more advantageous position compared to the barbell strategy that spreads exposure across multiple maturities.