Yield Curve Strategy in a Flattening Market

Scenario: You are the portfolio manager of a fixed income investment fund that aims to outperform a benchmark index composed of a diversified set of bonds. Over the last few months, you have observed a flattening yield curve and an increasing spread between investment-grade and high-yield bonds. The bond market has responded to strong economic indicators such as GDP growth and declining unemployment, but rising inflation expectations have also raised concerns among investors.

Task: Develop a detailed yield curve strategy that your portfolio can implement over the next 6 to 12 months. In your response, address the following questions:

• What type of yield curve strategy will you employ (e.g., bullet, barbell, ladder, or duration neutral) and why?
• How will you position the portfolio in terms of duration, given the current economic outlook?
• What specific actions will you take regarding the allocation between investment-grade and high-yield bonds?
• Finally, how will you manage potential risks associated with your proposed strategy?