Introduction

Near-dated Treasurys have become increasingly popular among investors as the Federal Reserve continues to raise interest rates. One strategy that has gained traction is bond laddering, which involves purchasing a portfolio of bonds with staggered maturity dates. This approach has seen significant growth, with Charles Schwab reporting a $1.3 billion increase in bond ladder assets during the first half of 2023, compared to $1.9 billion in all of 2022.

The Benefits of Bond Laddering

Bond laddering offers investors the advantage of spreading interest rate risk, which is particularly crucial given the Federal Reserve’s recent rate hikes. When interest rates rise, bond prices can fluctuate, especially for longer-dated bonds. By diversifying their portfolio with bonds maturing at different times, investors can mitigate this risk.

Additionally, bond laddering allows investors to maintain liquidity and invest in high-quality bonds while still earning a competitive yield. Even renowned investor Warren Buffett has shown interest in government bonds, with the 3-month Treasury bill currently yielding 5.4%.

New Bond Laddering Strategies by Charles Schwab

Recognizing the appeal of bond laddering, Charles Schwab recently introduced a range of Treasury bond laddering strategies managed by its Wasmer Schroeder Strategies team. These strategies include six-month, 12-month, and 24-month offerings, providing investors with various options to suit their investment preferences.

The Role of Short-Term Bond Ladders

While many experts recommend adding longer-dated bonds to portfolios, a short-term bond ladder can still serve a purpose for investors. Treasury bills with maturities of 3 months, 6 months, and 1 year currently yield over 5%, making them attractive to investors with short-term needs. This approach caters to two types of bond investors: those focused on total return and those seeking regular income.

For total return investors, it may be beneficial to add duration to their portfolio as interest rates peak. Duration measures a bond’s price sensitivity to changes in interest rates, and longer-dated bonds generally have higher durations. On the other hand, income investors can benefit from the higher yields offered by shorter-dated bonds, especially if they rely on their investment income for regular expenses.

Long-Term Bond Ladder Options

For investors with a longer-term perspective, Charles Schwab also offers bond ladders spanning from 5 years to 15 years, as well as a 1-year to 5-year variety. These options provide further flexibility to tailor the ladder to individual investment goals and time horizons.