A Time-Tested Fixed Income Strategy

By Kevin Flanagan, WisdomTree Senior Fixed Income Strategist

Although U.S. interest rates have risen from their record-setting depths, there is no doubt that, from a historical basis, they still remain rather low. Against this backdrop, I am asked on a regular basis: What’s a prudent strategy that fixed income investors can follow to not only help mitigate the potential for a further move up in rates but also take income-conscious needs into consideration? A time-tested approach that aims to solve for both of these factors is the barbell strategy.

For those readers who are unfamiliar with such an approach, a fixed income barbell is a strategy that essentially replicates the weight-lifting apparatus. In other words, the investor utilizes two parts of the yield curve: on the one side, the focus will tend to be on an intermediate or longer-duration vehicle while the other end of the spectrum will concentrate on a short-duration instrument. These two “weights” on the barbell serve two different purposes. The intermediate/longer-duration aspect can help to solve for income needs, while the short-duration investment serves as the “rate-mitigating” force.

Yield to Worse and Effective Duration Comparison

Enhanced Yield/UST FRN vs. Aggregate

Yield to Worse and Effective Duration Comparison
For definitions of terms in the glossary, please click here.

So, what does the barbell look like in practice? In this blog post, I will focus on two specific indexes: the Bloomberg Barclays U.S. Aggregate Enhanced Yield Index (AEY) and the Bloomberg U.S. Treasury Floating Rate Bond Index (UST FRN). The latter index, UST FRN, will serve as the short-duration weight of the barbell and is based on the 2-Year Treasury floating rate note. AEY is a yield-enhanced index that reweights the sectors of the Bloomberg Barclays U.S. Aggregate Bond Index (Agg) and serves as the longer-duration weight.