Bond ladder

A bond ladder is a portfolio built from bonds with staggered maturity dates, so that a portion of the holdings matures at regular intervals rather than all at once. An investor might buy bonds maturing in one, two, three, four, and five years, then as each one matures, reinvest the proceeds in a new bond further out on the ladder to keep the staggered structure going.

The structure manages two risks at once. It reduces reinvestment risk relative to holding only short-term bonds, since not all the money comes due and needs reinvesting at the same time, at whatever rate happens to prevail then. It also reduces interest rate risk relative to holding only long-term bonds, since a meaningful share of the portfolio is always close to maturity and less sensitive to rate moves. The tradeoff is a blended yield somewhere between the shortest and longest rungs of the ladder, rather than capturing the highest yield available at the far end alone.

Bond ladders are popular with retirees and other investors focused on income because they produce a predictable, recurring stream of cash as each rung matures, without requiring a view on where interest rates are headed. Because a portion of the ladder is always rolling over, the strategy naturally averages into whatever rates are available over time, similar in spirit to dollar-cost averaging applied to fixed income instead of stocks.