Hi
@brian.field I agree with your interpretation. I think this is analogous to how a barbell strategy tends to under-peform (over-perform) when there is a yield curve steepening (flattening). In Tuckman's example, both the benchmark index and portfolio share the same duration of 4.339 years, but the portfolio is more concentrated at the 30-year key rate. Tuckman only shows the key rate durations of the benchmark, where the 30-year key rate duration is only 0.349 years; i.e., a 10 basis basis shock to the 30-year key rate implies approximately at 0.035% price change in the bond portfolio. If we imagine the manager's key rate duration profile, it sums to approximately 4.339 years (i.e., same duration as benchmark) but the 30-year key rate is higher than 0.349. So it doesn't need to be a barbell per se, but it would be more concentrated at the 30-year key rate exposure.
Then under a yield curve flattening:
- The 30-year rate decreases more than, say, the 2-year rate. The manager's portfolio, which has the higher 30-year key rate duration, outperforms due to have a greater proportion of the portfolio "weighted" toward the 30-year rate exposure; or the other flattening:
- The 30-year rate increases less than, say, the 2-year rate. This is an overall loss on the long position, but the manager's portfolio experiences a lesser decrease (ie, outperforms) than the benchmark due to being more weighted toward the 30-year rate and less weighted toward to the shorter rates that decreased more. I hope that's helpful and your weekend is going well!
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