The Pros and Cons of Butterfly Barbells

Michael Christensen*
Associate professor The Aarhus School of Business, Fuglesangs All 4, DK-8210 Aarhus V., Denmark Tel.: +45 89 48 64 29; Fax: +45 86 15 19 43; E-mail: mic@asb.dk

Abstract During recent years butterfly barbells have been used actively as investment strategies. Such barbells are constructed in order to obtain a yield pick-up and at the same time to be risk neutral against a change in the slope of the yield curve and/or a parallel shift in the yield curve. However, empirically the yield curve may change in an unanticipated way, which can have drastic consequences for the outcome of the strategy. This paper addresses some of the various risk factors characterizing butterfly barbells, and it is shown that a potential yield pick-up is not the result of an arbitrage possibility, but rather it reflects the actual shape of the yield curve. Furthermore, in a dynamic setting we show that the yield pick-up gives false information about the holding period returns, which the investor can expect to obtain.

INTRODUCTION
The popularity of butterfly barbells has increased recently. This is partly because investment and portfolio managers can use such trades to obtain a yield pick-up on their investments, and partly because Bloomberg provides an easy and accessible feature to analyze butterfly barbells on their financial systems, see Devers [1999]. One argument in favor of barbells is that one can take advantage of a rally in long term bonds, without incurring the risk of the outright position, since the risk is hedged along the yield curve. To construct a butterfly barbell one sells (buys) one bond with a maturity of t2 years, and buys (sells) two bonds with maturities of t1 and t3 years, respectively, where t1 < t2 < t3.
*The author has a doctorate from the University of Southampton, U.K., and is an associate professor of finance at
the Aarhus School of Business in Denmark. He has worked as a financial analyst and financial manager at financial institutions and corporations.

The idea behind this strategy is to obtain a yield pick-up, which prevails if the bond with the middle maturity (t2) (the body) yields a lower yield to maturity than does the portfolio of the bonds with the short and the long maturities (the wings). In order to make this strategy neutral against a change in the yield curve, one of two possibilities apply. Either one can make a simple duration-hedge, where the duration of the portfolio of bonds, which are bought, equals the duration of the bond to be sold. Alternatively, one can mix the two bonds in the portfolio to be bought in a way, which makes the price risk equal for both bonds and furthermore equal to half the price risk of the bond, which is sold. In the former case the strategy will be immune to a parallel shift in the yield curve, and in the latter case the strategy is immune to both a parallel shift and a change in the slope of the yield curve. In both cases, however, the butterfly barbell is sensitive to a change in the curvature of the yield curve. This is probably the most important risk factor in butterfly barbell strategies, and we will, therefore, return to a rigorous analysis of this risk for each of the two hedging possibilities. First, we describe and analyze the risk of the durationhedged barbell, whereas the slope-neutral barbell is described and analyzed in the following section. Thus, the focus of this paper is the risk characteristics of butterfly barbells, and considerations about how to measure the yield spread and the consequences of different measurement methods will only be discussed briefly. For a discussion of the problems associated with the yield spread of butterfly barbells, a recent paper by Grieves [1999] addresses this issue. Grieves shows that different weighting methods give quite different conclusions as to the yield spread and the holding period returns. However, a major deficiency of the analysis provided by Grieves is that he restrict his analysis to two weighting methods; a market-value weighting and a duration dollar-weighting, which are only approximations to the correct method, where the yield is determined as the internal rate of return of the portfolio cash flows of the wings. This paper only uses the correct internal rate/cash flow method. Furthermore, as an addition to the analysis provided by Grieves, we show that the yield spread is not the result of an arbitrage possibility.

DURATION-HEDGED BARBELL1
To illustrate the principle behind a duration-hedged barbell, an example is made. In Exhibit 1, three bonds with different maturities are presented. EXHIBIT 1 here
2

Each bond has a coupon rate of 6%, which we assume is paid semi-annually on the same date. To see that a yield pick-up can be obtained by selling the 7 year bond and buying a portfolio consisting of the 5 year and the 9 year bonds, we add Exhibit 2, which illustrates the yield curve for the three bonds. EXHIBIT 2 here From Exhibit 2 we infer that a yield pick-up of 0.21% prevails2. However, to make this barbell immune to a parallel shift in the yield curve illustrated in Exhibit 2, we have to determine a duration-hedge between the portfolio to be bought and the 7 year bond, which should be sold. This hedge requires that the amount of the 5 year bond equals: x5
D9 D7 P7  D9 D5 P5

(1)

and the amount of the 9 year bond equals: x9

D7 D5 P7  D9 D5 P9

(2)

where x5 and x9 are the nominal amounts of each bond in the portfolio for a nominal amount of $ 1 for the 7 year bond to be sold, respectively, Di is the modified duration, and Pi is the price for bond i, where in this case i = 5, 7 and 9. Using the information given in Exhibit 1, we find: 0.446
0.567
6.55 5.45 974.97  6.55 4.14 1,000.00 5.45 4.14 974.97  6.55 4.14 934.05 (3)

(4)

This means that if the portfolio to be bought contains a nominal amount of $ 446 of the 5 year bond, and a nominal amount of $ 567 of the 9 year bond, this portfolio hedges an amount of $ 1,000 of the 7 year bond, i.e. the modified duration of the portfolio is exactly 5.453, which is identical to the modified duration of the 7 year bond. The duration-hedged
3

barbell, therefore, gives the investor a yield pick-up and secures him against a parallel shift in the yield curve. Two main questions arise, however. First, what will happen to this kind of barbell, if the yield curve changes and this change turns out not to be a parallel shift, but instead a change in the yield curve slope or its curvature. Second, one may wonder whether the yield pick-up in fact is the result of the 7 year bond being overvalued compared to the portfolio. These two issues will be considered in detail. Yield curve changes To analyze the consequences following a change in the slope or the curvature of the yield curve, we perform some simulations in Exhibit 34. The first part of Exhibit 3 shows the situation with an unchanged yield curve, and we see that the total amount of dollars needed to buy the portfolio exactly matches the total amount received from selling the 7 year bond, since the portfolio value in both cases is equal to $ 974.97. This is an important feature of the duration-hedged barbell, whereas when we turn to the slope-neutral barbell in the next section, we shall see that this is not cash-neutral. In the second part of Exhibit 3 we make a parallel change of the yield curve, and we confirm that this duration-hedged barbell in fact is neutral against an equal change in all interest rates. EXHIBIT 3 here Now turning to the third and the forth part of Exhibit 3, we are able to analyze the consequences of a change in the slope (third part) and the curvature (forth part) of the yield curve. The third part analyzes the case where the yield to maturity of the 5 year bond falls by 1% (to 5%) and the yield to maturity of the 9 year bond increases by 1% (to 8%), i.e. the slope increases by a total of 2%. Furthermore, we consider the opposite situation, where the slope falls by 2%, which gives an inverse yield curve with the 5 year bond yielding 7% and the 9 year bond yielding 6%. As expected, we find in this case that the portfolio and the 7 year bond are no longer hedged. In fact, if the slope increases by 2%, we loose $ 14.85, and if the slope decreases by 2%, we gain $ 18.82. Similarly, a change in the curvature of the yield curve gives rise to significant changes in the portfolio value. Again we analyze two situations. First, we increase the yield on the 7 year bond by 1% and decrease the yield on the 9 year bond by 1%, leaving the yield on
4

the 5 year bond unchanged. This increases the concavity of the yield curve. Performing the opposite experiment, i.e. decreasing the 7 year yield by 1% and increasing the 9 year yield by 1%, we obtain a convex yield curve. Again we infer that the portfolio is no longer hedged against the 7 year bond, and the portfolio value changes. We find that a gain of $ 90.32 follows from an increase in the concavity, whereas we loose $ 91.04, if the yield curve becomes convex. At this point it is worth noting that the gains and losses are significantly higher in the case of a change in the curvature compared to a change in the slope of the yield curve. This means that the duration-hedged barbell is much more sensitive to a change in the curvature of the yield curve than to a change in the yield curve slope. This is an important conclusion, since attention is usually directed to the risk arising from a change in the slope, and thereby the alternative slope-neutral barbell trade, whereas the much more significant curvature risk seems to be ignored or at least underestimated. Spot rate pricing The second question addressed above concerns whether the yield pick-up of 0.21% in fact is the result of the 7 year bond being overvalued compared to the portfolio. To answer this question, we focus on the pricing of the three bonds in Exhibit 1 using spot rates. Spot rates are usually not observed but instead derived from coupon bonds using a bootstrapping technique, if the bond market is complete, see Fabozzi [1995], or some statistical method as e.g. cubic splines, the Nelson-Siegel method, Nelson & Siegel [1987], or the CIR method, Cox et al. [1985], if the bond market is incomplete. In practice, however, bond markets are seldom complete and, therefore, one has to apply one of the statistical methods, although this only gives an approximation to the stripped spot curve. As a consequence the estimated spot curve will not be totally consistent with the underlying coupon bonds, i.e. we will find that some coupon bonds are overvalued, while others are undervalued, if priced according to the estimated spot curve. Pursuing this exercise a typical investment strategy is to buy undervalued bonds and sell overvalued bonds. But, interestingly, this strategy is not necessarily consistent with the yield pick-up obtained on the barbell strategy. To see this, we assume that a spot rate curve has been estimated among the coupon bonds available in the bond market. Exhibit 4 presents a potential spot rate curve.

EXHIBIT 4 here Using the sport rate curve in Exhibit 4 to price the 7 year bond and the duration-hedged portfolio, we can determine the theoretical price and compare this to the market price. Details are presented in Exhibit 5. EXHIBIT 5 here From Exhibit 5 we conclude that we are in fact able to construct an example, where an estimated spot rate curve predicts that the 7 year bond should be bought and the portfolio comprising the 5 year and the 9 year bonds should be sold. This conclusion is totally opposite the conclusion reached by comparing the yields to maturity, as is the case in butterfly barbells. This means that a positive yield pick-up may exit even though all three bonds are correctly priced according to the spot rate curve, and, therefore, the yield pickup does not represent a risk-free gain, which the investor can be sure to obtain5. Holding period returns and convexity As argued above a main characteristic of the duration-hedged barbell is that it is neutral against a parallel shift in the yield curve. Referring to Exhibit 3, we see, however, that this is not totally correct, since small differences appear between the portfolio value and the value of the 7 year bond. These differences arise because the portfolio and the 7 year bond have different convexities. In fact, it will always be the case that the portfolio comprising the barbell wings has greater convexity than the bond in the middle of the barbell, see Tuckman [1996]). From Exhibit 1 we infer that the convexity of the 7 year bond is 40.68, whereas the convexity of the portfolio is 43.556. This means that for parallel shifts in the yield curve, the portfolio and the 7 year bond will only be totally immunized for small changes in yields. If, however, yield changes are large e.g. 1% or more, we will find that the portfolio outperforms the 7 year bond. This can be verified from Exhibit 3, where the portfolio gain is 0.06 and 0.19, respectively, that is a positive gain irrespective of the direction of the yield change. Apparently, this argument is in favor of the barbell trading strategy. However, the conclusion that the portfolio is superior to the 7 year bond rests on a critical assumption, namely that we can ignore the passage of time. The analyzes performed above are all static, but in order to analyze the full consequences of a barbell strategy including
6

its prosperity, we need to perform a dynamic analysis incorporating the total holding period returns. The benefit from analyzing the holding period returns (HPR) is that we are able to take account of changes in yields as well as the time horizon. If we assume the time horizon is 6 months and furthermore that yields are unchanged for each of the three bonds, the holding period returns will equal their yields to maturity, i.e. the HPR will be 6% on the 5 year bond, 6.45% on the 7 year bond, and 7% on the 9 year bond measured on an annual basis. But since the barbell portfolio is a simple arithmetic average of the 5 year and the 9 year bonds, the portfolio holding period return will also be an arithmetic average of the HPR for each of these bonds, i.e. the HPR for the barbell portfolio can be determined to be 6.54%7, which is 0.12% lower than the initial yield to maturity of 6.66%. This means that even though yields are unchanged, an initial yield pick-up of 0.21% at time zero (t0) is not an indication of the HPR, which the investor can expect to obtain over a certain time horizon. This is due to the well known deficiency of the yield to maturity as a measure of return. In this case the duration-hedged barbell earns an excess HPR of 0.09%, see Exhibit 6. EXHIBIT 6 here Following this it is important to note that when considering the duration-hedged barbell after time elapses, we find that the yield pick-up increases with time, even if yields are unchanged. This means that if the investor does not close his trade down, he will be inclined to believe that his duration-hedged barbell becomes more and more attractive. The reason for this is that as time elapses the long term bond (the 9 year bond in this example) receives a relatively higher weight of the risky part of the portfolio, and, therefore, the portfolio yield to maturity will increase asymptotically to the yield to maturity of the long term bond. In Exhibit 7 the increase in the yield pick-up is illustrated, and we see that the yield pick-up increases as time elapses up to 5 years, where the 5 year bond matures, and hereafter the yield pick-up settles at 0.55%, which is equal to the difference between the yield to maturity on the 9 year bond (7.00%) and the 7 year bond (6.45%). EXHIBIT 7 here Next, we assume a parallel change in the yield curve. In this case, we find that the actual
7

size of the yield change affects the excess HPR on the portfolio. In fact, for moderate yield increases it turns out that the excess HPR decreases although only slightly (a % increase in the yield curve lowers the excess HPR from 0,090% to 0,086%), see Exhibit 6. For larger yield increases (above 1%) and for any parallel yield decrease, the excess HPR increases (a % decrease in the yield curve raises the excess HPR from 0,090% to 0,108%). According to Tuckman [1996] this can be explained by the fact that the portfolio has a higher convexity than does the 7 year bond, and consequently the portfolio will benefit the most from high yield volatility. Although, we have argued that the excess HPR varies with changing yields in the case of parallel shifts, this is usually of a rather small magnitude and still the excess HPR is positive. It is, therefore, much more interesting to consider non-parallel shifts in the yield curve e.g. the cases where the slope or the curvature of the yield curve changes. In the third and the forth parts of Exhibit 6 we analyze these situations. First, we change the yield curve slope by +2% and -2%, respectively, and then we change its curvature by increasing (decreasing) the 7 year yield by 1% and decreasing (increasing) the 9 year yield by 1%. From the third part of Exhibit 6 we infer that the HPR becomes negative by 3.05%, if the yield curve becomes steeper, whereas a positive HPR of 3.97% follows from a flattening of the yield curve. These results are close to the static results presented in Exhibit 3. Also we can confirm the static results concerning a change in the yield curve curvature. Increasing the concavity yields a HPR of 17.71% and a decrease in the concavity gives rise to a negative HPR of 17.64%. In conclusion, the duration-hedged barbell is a risky trade. First, an apparent yield pick-up may give false information about the actual HPR, the investor can expect to receive, even if yields are unchanged or shift in a parallel fashion. Secondly, only marginal changes in the yield curve slope or its curvature may turn out to have significant consequences in terms of negative HPRs. To overcome the problems associated with changes in the yield curve slope, the alternative slope-neutral barbell has been suggested. The next section is devoted to an analysis of this type of butterfly barbell.
8

SLOPE-NEUTRAL BARBELL
The slope-neutral barbell is constructed in a way, which makes it neutral against both a parallel shift in the yield curve and a change in the yield curve slope. This requires that the weights attached to each of the two bonds in the wings make the price risk of each bond equal and furthermore equal to half the price risk of the bond in the middle. The weights can be determined as: x5
( P7D7 P5D5

(5)

for the 5 year bond and: x9

( P7D7 P9D9 )

(6)

for the 9 year bond, and using the information given in Exhibit 1, we find: 0.641
( 974.975.45 ) 1,000.004.14 974.975.45 ) 934.056.55 (7)

0.434
(

(8)

To see that these weights are optimal in the sense of making the portfolio neutral against a parallel shift as well as a shift in the slope of the yield curve, we add Exhibit 8, which gives details of the price risks. EXHIBIT 8 here Exhibit 8 confirms that the price risk for each of the two bonds in the wings are equal and are equal to half the price risk of the body (the 7 year bond). To illustrate that these features in fact are sufficient to make the strategy immune against a parallel shift as well as a shift in the yield curve slope, we refer to Exhibit 9.

EXHIBIT 9 here From the second part of Exhibit 9 we infer that a parallel shift in the yield curve gives rise to a price difference between the portfolio and the 7 year bond of $ 71.54 and $ 71.56, respectively, which is very close to the actual price difference of $ 71.56 for an unchanged yield curve. Furthermore, we see that the price difference arising from a change in the yield curve slope (the third part) is in the neighborhood of the actual price difference, although they are not identical. Increasing the slope by 2% lowers the price difference to $ 70.50, whereas decreasing the slope by 2% raises the price difference to $ 75.29. This confirms that the slope-neutral barbell is neutral against a parallel shift and to a great extent it is also neutral against a shift in the slope of the yield curve. Again differences in convexity explain that the hedges are not perfect. Besides being almost neutral against a change in the yield curve slope, a number of other differences between the duration-hedged barbell and the slope-neutral barbell appear. First, we notice from the first part of Exhibit 9 that the slope-neutral barbell contrary to the duration-hedged barbell is not price-neutral, that is we have to add money to be able to buy the portfolio comprising the 5 year and the 9 year bonds. In this example another $ 71.56 is needed to finance this trade. This difference arises because using two bonds in the barbell portfolio only two factors can be hedged. In the duration-hedged barbell, we hedge the price amount and the modified durations (hedge against a parallel shift), whereas in the slope-neutral barbell we hedge the modified durations and the price risks (hedge against a change in the slope), leaving the price amounts unhedged. Since further funds are required to finance the slope-neutral barbell, we must take account of any funding costs, when determining the expected holding period returns (the yield pick-up). Second, huge differences between the yield pick-up on the slope-neutral barbell and the duration-hedged barbell prevails. Generally, we find that for an increasing yield curve, the yield pick-up on the duration-hedged barbell is higher (lower) than the yield pick-up on the slope-neutral barbell, if the middle bond is the bond to be sold (bought) and reverse for an inverse yield curve. In the example used here, we find the yield pick-up on the duration-hedged barbell to be 0.21%, see Exhibit 2, but the slope-neutral barbell only produces a yield pick-up of 0.06%, since the portfolio internal rate of return is found to be 6.51%.
10

As is evident from Exhibit 9, the slope-neutral barbell does not hedge the yield curve curvature. Increasing the concavity of the yield curve gives a gain of (139.14 - 71.56) $ 67.58, whereas a decrease in the yield curve concavity gives rise to a loss of $ 69.77. This means that the outcome of both barbell strategies is very much dependent on whether or not the curvature of the yield curve changes. Litterman & Scheinkman [1988] argue that although a portfolio is duration hedged, it may be sensitive to curvature, and they suggest a three-factor approach comprising a level-factor, a steepness-factor and a curvature-factor. Along these lines we will argue that predicting the future is a difficult task in general, and although investors may have access to analytical tools relevant for predictions of how the level of yields will change in the future, only very sophisticated investors are able to forecast changes in the yield curve slope, and in particular, its curvature8. For example, changes in Federal Reserve policy is a major source of change in the yield curve slope, and changes in the curvature of the yield curve are mainly the result of changing supply and demand conditions on the bond market reflecting changing habitats. Especially, the latter is difficult to forecast.

CONCLUSIONS
Essentially, a butterfly barbell identifies a yield pick-up, while at the same time being neutral against shifts in the yield curve, that is either a parallel shift (the duration-hedged barbell) or both a parallel shift and a change in the yield curve slope (the slope-neutral barbell). This paper gives a thorough static and dynamic analysis of butterfly barbells and, in particular, their relevant risk factors with focus on the curvature risk, which is not hedged by any of the two types of barbells. The analysis has shown that curvature risk is significant, and that only marginal changes in the yield curve curvature will have drastic consequences for the outcome of both types of barbells. Furthermore, we have shown that the yield pick-up is the result of the actual shape of the yield curve, meaning that a potential yield pick-up does not represent an arbitrage possibility. Furthermore, the yield pick-up is shown to be a bad indicator of the holding period returns, which the investor can expect to receive.

11

ENDNOTES
1. Bloomberg terms the duration-hedged barbell a butterfly swap trade, whereas the slope-neutral barbell is termed an arbitrage trade, whereas Grieves [1999] uses the terms Cash- and Duration-Neutral and Fifty-Fifty, respectively. 2. The portfolio yield to maturity is determined as the internal rate of the portfolio cashflows. In fact this method is superior to the different weighting methods analyzed by Grieves [1999]. 3. Contrary to the determination of the portfolio yield to maturity, which is based on the portfolio cash-flows, we determine the portfolio duration (and convexity) as a simple weighted price average. It is shown in Christensen [1999] that this method is superior to the portfolio cash-flow method, when the yield curve is non-flat. We find: [0.4461,0004.14 + 0.567934.056.55]/[0.4461,000 + 0.567934.05] = 5.45. 4. In Christensen & Fabozzi [1987] the risk of a barbell structure is discussed in relation to immunization. 5. This conclusion holds generally, i.e. for complete markets as well, where the spot rate curve is determined uniquely. 6. We find the portfolio convexity to be: [0.4461,00023.09 + 0.567934.0560.78] /[0.4461,000 + 0.567934.05] = 43.55. 7. The portfolio HPR is determined as: 2[0.446(1,000-1,000+30) + 0.567(936.74934.05+30)] /[0.4461,000 + 0.567934.05] = 6.54, where the prices after year are 1,000 and 936.74 for the 5 year and the 9 year bonds, respectively. 8. However, Litterman et al. [1988] suggest that the yield curve shape can be identified from observing the yield curve volatility.

12

REFERENCES
Christensen, M. Duration and Convexity for Bond Portfolios. Finanzmarkt und Portfolio Management, 13 (1999), pp. 66-72. Christensen, P.E., and F.J. Fabozzi. Bond Immunization: An Asset Liability Optimization Strategy. in F.J. Fabozzi and I.M. Pollack (eds.). The Handbook of Fixed Income Securities, 2nd Edition, Dow Jones-Irwin 1985, pp. 676-703. Cox, J.C., J.E. Ingersoll, and S.A. Ross. A Theory of the Term Structure of Interest Rates. Econometrica, 53 (1985), pp. 385-407. Devers, B. Fly Like an Eagle, Hedge Like a Butterfly. Bloomberg Magazine, August 1999, pp. 87-89. Fabozzi, F.J. The Structure of Interest Rates in F.J. Fabozzi and T.D. Fabozzi (eds.). The Handbook of Fixed Income Securities, 4th Edition, IRWIN 1995, pp. 113-137. Grieves, R. Butterfly Trades. The Journal of Portfolio Management, Fall (1999), pp. 8795. Litterman, R., and J. Scheinkman. Common Factors Affecting Bond Returns. Journal of Fixed Income, 1 (1988), pp. 54-61. Litterman, R., J. Scheinkman, and L. Weiss. Volatility and the Yield Curve. New York: Goldman Sachs, 1988. Nelson, C.R., and A.F. Siegel. Parsimonious Modeling of Yield Curves. Journal of Business, 60 (1987), pp. 473-489. Tuckman, B. Fixed Income Securities, New York: John Wiley & Sons, 1996.

13

EXHIBIT 1. ILLUSTRATIVE BOND MARKET Bond type 6% 5 year 6% 7 year 6% 9 year Price 1,000.00 974.97 934.05 Yield to maturity 6.00% 6.45% 7.00% Modified duration 4.14 5.45 6.55 Convexity 23.09 40.68 60.78

14

EXHIBIT 2. THE YIELD CURVE

15

EXHIBIT 3. PRICE VALUE FOR YIELD CURVE SIMULATIONS

Yield changes
Unchanged yield curve Parallel shift: Parallel shift: Increasing slope: +1% -1%

7 year bond
974,97 922.01 1,031.65

Portfolio
974,97 922.07 1,031.84

Difference 0 0.06 0.19

5Y -1% 7Y 0% 9Y +1% Decreasing slope: 5Y +1% 7Y 0% 9Y -1% Increasing concavity: Decreasing concavity: 5Y 0% 7Y +1% 9Y -1% 5Y 0% 7Y -1% 9Y +1%

974.97

960.12

-14.85

974.97

993.79

18.82

922.01

1,012.33

90.32

1,031.65

940.61

-91.04

16

EXHIBIT 4. SPOT RATE CURVE

17

EXHIBIT 5. SPOT RATE AND MARKET PRICING 7 year bond Theoretical price Market price Undervaluation (+) Overvaluation (-) 978.18 974.97 3.21 -2.45 Portfolio 972.52 974.97

18

EXHIBIT 6. HOLDING PERIOD RETURNS FOR DYNAMIC YIELD CURVE SIMULATIONS

Yield changes
Unchanged yield curve Parallel shift: Parallel shift: Increasing slope: 5Y 7Y 9Y Decreasing slope: 5Y 7Y 9Y Increasing concavity: Decreasing concavity: 5Y 7Y 9Y 5Y 7Y 9Y +% -% -1% 0% +1% +1% 0% -1% 0% +1% -1% 0% -1% +1%

7 year bond
6.450% 1.234% 11.835%

Portfolio
6.540% 1.320% 11.943%

Difference 0.090% 0.086% 0.108%

6.45%

3.40%

-3.05%

6.45%

10.42%

3.97%

-3.82

13.89%

17.71%

17.39%

-0.25%

-17.64%

19

EXHIBIT 7. YIELD PICK-UP

20

EXHIBIT 8. PRICE RISK FOR THE SLOPE-NEUTRAL BARBELL 5 year bond Price (P) Mod. Duration (D) Amount (x) Price Risk (PDx) 1,000.00 4.14 0.641 2,655.86 7 year bond 974.97 5.45 1.000 5,311.73 9 year bond 934.05 6.55 0.434 2,655.86

21

EXHIBIT 9. PRICE VALUE FOR YIELD CURVE SIMULATIONS

Yield changes
Unchanged yield curve Parallel shift: Parallel shift: Increasing slope: 5Y 7Y 9Y Decreasing slope: 5Y 7Y 9Y Increasing concavity: Decreasing concavity: +1% -1% -1% 0% +1% +1% 0% -1%

7 year bond
974.97 922.01 1,031.65

Portfolio
1046.53 993.55 1,103.21

Difference 71.56 71.54 71.56

974.97

1,045.47

70.50

974.97

1,050.26

75.29

5Y 0% 7Y +1% 9Y -1% 5Y 0% 7Y -1% 9Y +1%

922.01

1,061.15

139.14

1,031.65

1,033.44

1.79

22