Managing Interest Rate Risk in Fixed Income Portfolios

As the head of fixed income portfolio management at Alpha Capital, you are tasked with managing a diversified bond portfolio with a duration of 6.5 years. Recent market conditions indicate a rising interest rate environment.

Your team is considering various strategies to mitigate interest rate risk while still aiming for a target yield of 4% on the portfolio. You have the option to utilize various instruments, such as Treasury bonds, corporate bonds, interest rate swaps, and the implementation of a barbell strategy.

Discuss the potential impact of rising interest rates on the portfolio's value and explain the strategies you would implement to manage interest rate risk effectively. Be sure to incorporate aspects of duration, convexity, and the trade-offs associated with your selected strategies.