Near-dated Treasurys have experienced significant growth due to the Federal Reserve’s rate-hiking campaign. As a result, a strategy that allows investors to generate income in the short term has gained popularity. This strategy, called bond laddering, involves purchasing a portfolio of bonds with staggered maturities. According to data from Charles Schwab, bond laddering has gained traction this year. The brokerage firm recently reported a $1.3 billion increase in new bond ladder assets during the first six months of 2023, compared to $1.9 billion in all of 2022. The advantage of bond laddering is that it helps investors diversify their interest rate risk, which is particularly crucial given the Federal Reserve’s 11th rate hike. Rising interest rates can lead to price fluctuations in bonds, especially those with longer-dated maturities. Even renowned investor Warren Buffett is investing in government bonds, with the 3-month Treasury bill yielding 5.4%. US3M US6M 1Y line U.S. 3 month and 6 month Treasury yields “Typically, the yield curve is upward sloping, and you have to go longer term or down in credit to get yield, but now you can stay high-quality and maintain liquidity in the portfolio,” said David Lafferty, managing director of product strategy and development at Schwab Asset Management. In line with this, the firm recently launched three Treasury bond laddering strategies: six-month, 12-month, and 24-month offerings managed by its Wasmer Schroeder Strategies team.
Benefits of Short-Term Bond Laddering
Despite the recommendations of strategists to invest in longer-dated bonds, a short-term bond ladder can still serve a purpose in an investor’s portfolio. For example, 3-month, 6-month, and 1-year Treasurys currently yield over 5%, making them attractive options for investors with short-term needs. David Lafferty explains, “There are two bond investors: total return and income. The historical data suggests that as rates reach their peak, it makes sense for total return investors to add some duration to their portfolio.” Duration is a measure of a bond’s price sensitivity to changes in interest rates, and longer-dated bonds have the highest duration. Lafferty adds, “For income investors, higher yields are still available at the shorter end, which may be suitable for individuals who rely on income from their portfolio, such as retirees.” Schwab offers a range of bond laddering options, including 5-year to 15-year ladders and 1-year to 5-year ladders, catering to both short-term and long-term investment goals.
