Bond Portfolio Strategies

Three primary strategies help manage interest rate risk in fixed-income portfolios. Each structures bond maturities differently to serve a specific goal.

Barbell Strategy

Definition: Concentrates holdings in short-term and long-term bonds, with little or no intermediate-term exposure.

• Short-term bonds provide liquidity and low interest rate risk
• Long-term bonds provide higher yields
• More actively managed than a ladder; requires adjusting positions as bonds mature
• Benefits when the yield curve flattens (long-term rates fall relative to short-term rates)
• Higher reinvestment risk than a ladder (short-term bonds mature and must be reinvested frequently)

Think of it this way: Picture a barbell at the gym: heavy weights on each end, nothing in the middle. A barbell bond portfolio loads up on short-term and long-term bonds with a gap in between.

Bullet Strategy

Definition: Concentrates bond purchases around a single target maturity date. Bonds are purchased at different times but all mature at approximately the same time.

• Appropriate when the investor has a known future cash need (e.g., college tuition, balloon mortgage payment)
• Benefits when interest rates fall (all bonds appreciate as rates drop, and none mature early)
• Higher concentration risk than a ladder (all maturities in one time window)

Think of it this way: A bullet is aimed at a single target. A bullet portfolio aims all maturities at one future date when you need the money.

Exam Tip: Gotchas

• If the question mentions a "specific future obligation" or target date, choose bullet. Bullet = liability matching. Bonds are purchased at different times but all mature together.

Ladder Strategy

Definition: Invests in bonds with staggered, evenly spaced maturities (e.g., 1, 2, 3, 4, 5 years).

• As each bond matures, proceeds are reinvested in a new long-term bond at the end of the ladder
• Mitigates reinvestment risk - not all bonds mature at once, so reinvestment occurs across different rate environments
• Mitigates interest rate risk - blends short-term and long-term exposures
• Provides regular, predictable cash flow from maturing bonds
• Simple, passive strategy suitable for income-oriented investors

Think of it this way: A ladder has evenly spaced rungs from bottom to top. Each rung is a bond maturing in a different year. You climb the ladder one rung at a time, reinvesting as you go.

Exam Tip: Gotchas

• If the question mentions "reducing the impact of rate changes over time," choose ladder. Ladder = rate neutralization via rolling reinvestment.

Side-by-Side Comparison