Fixed Income

Bond Ladders

One of the most successful investing strategies in fixed income is diversification by laddering maturities. This investment technique provides the benefit of blending the higher rates usually associated with long-term bonds with the liquidity of short-term maturities. The resulting diversification helps reduce risk, improve returns and allow for reinvestment flexibility, while also providing liquidity and predictable cash flows.

A laddered portfolio is structured by purchasing several bonds with consecutive maturities. As each bond matures, proceeds are reinvested in a new bond having a maturity that corresponds with the longest term on the ladder, which often carries higher yields. Bond ladders containing noncallable bonds may be more predictable as they cannot be redeemed by the issuer prior to maturity date.*

Types of Bond Ladders:

• Check-a-Month
  Since most bonds pay income semi-annually, selecting six specific bonds that pay interest in different months can create a monthly cash flow to supplement income or provide an opportunity for reinvestment.
• Systematic Investing
  Investors who do not have sufficient funds to build a complete ladder but can save enough for a rung each year, should begin in the middle and add positions on either side in subsequent years. For long-term investors, systematic investing also provides the ability to take advantage of swings in interest rates.
• Barbell Investing
  A barbell strategy entails investing at the short and long ends of the yield curve, leaving intermediate maturities out. A barbell ladder can also contain all maturity ranges but be over-weighted on the shortest and longest maturities. This technique is generally employed by investors who expect the yield curve to flatten. Short-term investing provides liquidity and less risk as rates increase. However, when rates start to drop, the long end provides the potential for capital gains.

View sample ladder (PDF)

*Certain bonds have a call provision, which means that the issuer of the bond can repay the bond early, in which case investors would usually be faced with reinvesting their principal at lower interest rates. Investors may incur fees or transaction charges when structuring a laddered portfolio.

Next: Bond Portfolio Evaluation & Reporting