A bond portfolio manager notices a hump in the yield curve at the 5-year point. How might a bond manager take advantage of this event?

Question

Quizplus · Accepted Answer

By buying the 5-year bonds and shorting the surrounding maturity bonds, the bond manager can take advantage of the hump in the yield curve at the 5-year point. The manager can benefit from the higher yield on the 5-year bonds, while also protecting against interest rate risk by shorting the surrounding maturity bonds. This strategy is known as a "barbell" strategy because it involves buying bonds at both ends of the yield curve and shorting bonds in the middle.

A Bond Portfolio Manager Notices a Hump in the Yield