Municipal Bond Forum
Short-term ‘layering’?
Q
I could be wrong, but what about the strategy of short term layering of bonds (two to five years) in a rising interest rate environment? How much would interest rates have to rise over the next few years to counter your view on the disadvantages of laddering?
A
James A. Klotz responds:
This strategy only makes sense to us if you have the ability to accurately predict interest rate movements. The Federal Reserve has been hiking short-term interest rates since June 2004 (rising interest rate environment?).
At that time the 10- and 30-year Treasury bonds were yielding 4.70% and 5.37% respectively. After 11 Fed rate increases, these yields now stand at 4.28% and 4.55%.
As you can see, long-term interest rates have been declining while short rates have been rising. If you implemented your ladder in June 2004, as opposed to buying long-term bonds you will never make up the sacrificed income. This is why laddering is a flawed strategy for income investors. If your objective is 100% liquidity and maintenance of principal, park your funds in a money market.
By the time the Fed is done tightening and short-term interest rates begin to decline, we will likely be looking at much lower long-term rates also.
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