Optimal Yield Curve Strategy Under Upward-Sloping Curve

ABC Capital is managing a fixed income portfolio with the objective of outperforming the benchmark over the next 12 months. The current yield curve is upward-sloping, indicating that long-term rates are significantly higher than short-term rates. The portfolio manager is considering implementing a yield curve strategy to capitalize on this situation. The manager has three options:

1. Duration neutral positioning with a focus on maximizing yield by investing primarily in long-duration bonds.

2. A barbell strategy that involves buying both long-term and short-term bonds while avoiding intermediate maturities.

3. An extension strategy, where the manager would shift the portfolio’s maturity profile to include a greater share of bonds with longer maturities to capture potential price appreciation as yields decrease.

Which strategy should the portfolio manager prioritize to take advantage of the upward-sloping yield curve while managing interest rate risk effectively?