A bond ladder: a way of not guessing rates

Choosing a bond's maturity is an implicit bet on the future direction of interest rates. A ladder lets you avoid making that bet.

How it is built

Capital is split into several parts, each invested in an issue with its own maturity: the nearest, the next and so on. As each part matures, the money goes into the longest rung of the ladder.

What it gives

A regular return of capital: every year part of the portfolio matures and can be used or rolled.

A smoothed rate: part of the portfolio is always rolled at current terms, so the average yield follows the market gradually rather than being locked in at an unlucky moment.

Moderate duration: the short rungs damp the sensitivity of the long ones — Duration: why long bonds fall harder.

What it does not solve

Credit risk: if every rung is made of the same issuer's paper, there is no diversification. The rungs have to differ by issuer too.

Inflation risk: with persistently high inflation a ladder of nominal bonds loses — Inflation-protected bonds: how the principal is restated.

A practical note

A ladder is easier to build from issues without put dates and without amortisation: both shift the actual maturities and break the construction — The put date: miss it and you are left holding a different bond, Bond amortisation: when principal comes back in instalments.