Bond Ladders
A bond ladder is a portfolio of bonds with maturities spread over regular intervals. The strategy reinvests a maturing bond’s proceeds back into the long end of the ladder, thereby maintaining the integrity of the laddered (interval) structure.
WHY IS BOND LADDER?
MITIGATE REINVESTMENT RISK
Reinvestment risk is spread over a range of maturities. Just as a constructed portfolio may not have too much concentration/exposure in any one issuer or sector, a bond portfolio may benefit from diversified maturities. Picking a small window of maturities exposes an investor to market conditions at a specific point in time whereas a laddered maturity strategy spreads market risk over different moments in time, thus mitigating the reinvestment risk of having the entire portfolio rollover on one specific date.
BOND LADDERS CAN BENEFIT FROM RISING RATES
A bond ladder can benefit from a rising interest rate environment by keeping the portfolio invested and earning income all along the way. As interest rates rise, the maturing principal is reinvested back into the strategy at the new higher interest rates, leading to a gradual increase in the overall portfolio yield.
DIVERSIFY MATURITIES
A bond ladder can prevent the timing risks associated with investing in a single maturity. Maintaining a single maturity exposes an investor to reinvesting at a single moment, which may be during higher or lower interest rate environments. Timing becomes a critical factor with the return. Laddered strategies mitigate timing risk by reinvesting during various times.
REINVESTING WITH BOND LADDERS
For illustrative purposes. Reinvest proceeds from matured bonds into the long end of the ladder, thus maintaining the ladder structure.
REGULAR LIQUIDITY
The orderly maturity range of a bond ladder can also act as a liquidity source. For example, a ladder’s scheduled maturity may provide an investor with timely liquidity and avoid a disadvantaged market sale of a random portfolio holding. The recurring maturities also provide the opportunity to reposition the portfolio (into different asset classes, sectors, credit quality, maturity range, etc.) over time as deemed appropriate by changing investment objectives and/or market dynamics.
Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Past performance is no assurance of future results.
This communication is intended to help improve the efficiency with which Financial Advisors obtain information relevant to their client's taxable fixed income holdings. Prior to transacting in any security, please discuss the suitability, potential returns, and associated risks of the transactions(s) with your Raymond James Financial Advisor.
This time-honored investment technique, in which an investor blends several bonds with differing maturities, provides the benefit of blending higher long-term rates with short-term liquidity. Should interest rates remain unchanged, increase, or even decline, a laddered approach to fixed income investing may help reduce risk, improve yields, provide flexibility and provide shorter-term liquidity. Risks include but are not limited to: changes in interest rates, liquidity, credit quality, volatility and duration. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices rise. Diversification does not ensure a profit or protect against a loss. Investments are subject to market risk, including possible loss of principal.
The information contained herein has been prepared from sources believed reliable but is not guaranteed by Raymond James and is not a complete summary or statement of all available data, nor is it to be construed as an offer to buy or sell any securities referred to herein. Investors are urged to obtain and review the relevant documents in their entirety. Securities identified herein are subject to availability and changes in price. All prices and/or yields are indications for informational purposes only. Examples provided are hypothetical and not intended to reflect the actual terms or characteristics of any security. Additional information is available upon request.
Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.