Strategic Fixed Income Investing: An Insider's Perspective on Bond Markets, Analysis, and Portfolio Management

CHAPTER 12

Alternatives to a Traditional Ladder Strategy

Buy right and hold tight.

—John C. Bogle

This chapter is geared to provide alternatives or options for funding purposes in the creation of a low-turnover or laddered bond strategy. A traditional taxable laddered strategy employs the U.S. Treasury sector. This is a strong and suitable strategy when the market looks attractive, but what should be used when the Treasury market looks frothy and does not look very promising? A perfect example is the 2011 time frame. Interest rates were at ultralow levels and in some cases, prices were at all-time highs. This is a terrific example of when the Treasury sector may not look as attractive as other sectors or asset classes for a variety of reasons. Treasury yields may not look very enticing for a number of reasons, such as an outright price level, or even from a yield to maturity standpoint. A low-yield environment can be detrimental to a fixed income investor. This type of environment is capable of deterring many investors from putting their money to work as frustration sets in. Many investors see the low-yield environment as problematic, because fixed income investors usually use the proceeds from the coupon or yield calculation as income or as a part of the total return calculation. From 2008 through mid-2012, yields within the Treasury market continued trending lower. It wouldn't surprise me if this pitfall of low yields felt by investors doesn't abate anytime soon. It may continue ...