Wednesday, September 25, 2024 |
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MANAGING DIRECTOR: |
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US Treasury Market |
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| Date | 1 mo | 3 mo | 6 mo | 1 yr | 2 yr | 3 yr | 5 yr | 7 yr | 10 yr | 20 yr | 30 yr |
| 09/18/24 | 4.79 | 4.75 | 4.51 | 3.98 | 3.62 | 3.49 | 3.48 | 3.58 | 3.70 | 4.08 | 4.02 |
| 09/19/24 | 4.64 | 4.73 | 4.48 | 3.96 | 3.60 | 3.49 | 3.50 | 3.61 | 3.74 | 4.13 | 4.07 |
| 09/20/24 | 4.75 | 4.66 | 4.47 | 3.94 | 3.59 | 3.48 | 3.50 | 3.61 | 3.74 | 4.13 | 4.09 |
| 09/23/24 | 4.71 | 4.62 | 4.44 | 3.93 | 3.59 | 3.49 | 3.51 | 3.62 | 3.75 | 4.14 | 4.09 |
| 09/24/24 | 4.67 | 4.62 | 4.37 | 3.89 | 3.54 | 3.44 | 3.47 | 3.59 | 3.73 | 4.13 | 4.09 |
The data in the table above is static as of the time it was pulled, so rates may have changed. Treat all data in this table and PMR as indications only and availability is always subject to change. This information was pulled manually from sources we believe to be reliable. New source, as of 12/12/2022, Bloomberg, L.L.P. As of: close of business 09/24/2024.
Bond Laddering Works (no matter what mutual fund managers tell you)
Rates are falling and portfolios which have been sitting on too much cash should be ready and eager to put funds to work and maximize income while minimizing their risk profile. But what’s the best way to make that happen? For an investor desiring to build a portfolio comprised of high quality, simple and predictable bonds, a laddered bond portfolio is the answer.
The virtues of bond laddering can be found in chapter one of any textbook on fixed income portfolio management. The basic idea is to construct a certain, known and steady stream of cashflows (both principal and interest) which are inelastic to changes in interest rates. Specifically, a bond ladder attempts to match cash flows with anticipated demand for that cash through a multi-maturity construct (eg: 1 – 10yrs). The ladder’s measured pace reduces reinvestment risk associated with rolling over disproportionate sums coming due all at once. When the “front end” maturity pays off the funds will be dispatched in one of two ways: Allocated to other purposes or reinvested at the “back end” of the portfolio ladder. This disciplined investment strategy is akin to dollar cost averaging with equity portfolios.
Some investors might consider bond laddering portfolio immunization against dramatic market price/yield shifts. This stands to reason as the short end of the ladder exhibits less price volatility than the long end and dollars are reinvested regularly. Furthermore, laddering is shrewdly simple and cost efficient (minimal fees).
Yet some investors don’t appreciate the ladder’s charms. Some professionals even get it wrong. A syndicated personal finance author cited six reasons bond ladders are bad for investors. As you’ll see below, all six objections appear incorrect (and, in some instances, laugh-out-loud foolishly wrong).
INCORRECT ASSERTION #1: Bond Ladders Deprive Investors of Current Income. Supposedly, bond fund investors will earn substantially more when interest rates rise because managers are buying, new, higher yielding bonds.
- RESPONSE: How’d this work over the past two years bond fund investors? Managers doing this sold lower coupon bonds at losses which reduced Net Asset Value (think Par Value). So even if the average coupon rate is higher, the underlying store of principal is lower (due to realized losses). This is not a text book method of increasing value or income. It is, however, a well-practiced method of creating capital losses.
INCORRECT ASSERTION #2: Bond Ladders Often Force Investors to Reinvest at Lower Rates. The wrong-headed assumption here is that bond ladder investors won’t have sufficient funds (from coupons and maturities) to reinvest into another bond. I wonder if the author knows that US Treasuries can be purchased in lots as small as $1,000? This supposedly forces laddering investors to sit in (historically) lower yielding cash money market funds until they amass more substantial balances for reinvestment.
- RESPONSE: With uninterrupted regularity, bond maturities and coupons are very easily and efficiently reinvested into various stripes of fixed income. It is as common as breathing.
INCORRECT ASSERTION #3: Bond Ladders Deprive Investors of Capital Gains. This is a laugher! The notion is bond funds which have invested in X, Y and Z bonds will have gains, those gains will be realized and NAV will move commensurately higher. Yet somehow, laddering investors who also own X, Y and Z bonds won’t be likely to realize those gains.
- RESPONSE: There’s no rule that prevents laddering investors from taking gains whenever desired. Furthermore, even if laddering investors were somehow precluded from taking gains as desired, the enhanced value is STILL THERE (just not realized) and all the while the original, now higher than current market coupon stream is intact and earning at a pace above and beyond that which a gains trading fund investor could match.
INCORRECT ASSERTION #4: Bond Ladders Carry More Default Risk. This statement is predicated on the notion that laddering investors won’t have sufficient funds to spread credit risk appropriately. Whereas bond funds do have such largesse and will appropriately diversify.
- RESPONSE: What’s the risk of default in a US Treasury? Or US agency? Or prerefunded muni? Nunca, nein, none, zero! Furthermore, the default rate in top quality, well known, plain vanilla GO muni bonds or essential purpose revenue bonds is far to the right of the decimal.
INCORRECT ASSERTION #5: Bond Ladders Leave Investors Unprepared for Emergencies. So the author suggests bond mutual funds are ready cash, all the time. Yet bonds in a ladder are not.
- RESPONSE: Wrong, wrong wrong…a thousand times wrong. So the X, Y and Z bonds in the mutual fund can be sold anytime “without cost” but the X, Y and Z bonds in your own ladder cannot? Really?! This suggests the bond fund manager conjures a magic liquidation process that another bond owner cannot. Furthermore, the author cites possible losses (due to higher rates, lower prices) that the laddered portfolio will be subject to. Yet this is somehow not germane to the discussion when considering the fund? Wrong, wrong, wrong.
The reality of the matter is the laddered investor can liquidate a holding at any time with, very likely, the same market spreads that the fund manager would experience (markets with the highest liquidity and trading volume demonstrate this best). And all the while the laddered portfolio is NOT PAYING A MANAGEMENT FEE for this privilege.
INCORRECT ASSERTION #6: Bond Ladders Are Expensive. The author suggests the process of buying and constructing a ladder is more expensive because of market spreads and dealer markups. Whereas a no-load fund merely has “small” management fees to pay each year.
- RESPONSE: Again, our author is woefully unaware of market conventions which afford buyers of all shapes and sizes efficiencies which are not solely reserved for bond fund managers. For instance, newly issued US agencies and certain corporate and municipal bonds will initially be offered “at syndicate pricing” to all comers. Whether buying large lots or small lots, the pricing is the same (the greater challenge, for ALL varieties of investors, may be gaining access to the bonds). And if US Treasuries are the topic, buyers of every inclination may acquire them at virtually no cost through the Fed in regularly scheduled single price auctions (aka: Dutch Auctions). And again…no annual fee is paid for the mere honor of owning these fixed income delights. Lastly, the author conveniently ignores that these same heralded no-load funds will often carry a Deferred Contingent Sales Charge (DCSC). While these DCSCs will typically expire after five years, they are additional fees due and payable upon liquidation to the fund company.
Bottom Line: Laddering is as basic, pure and cherished in bond portfolio management as hot dogs, moms and apple pie are to the American spirit. If you seek a no-drama “hit singles and get to the hall of fame” bond portfolio strategy, give yourself a leg up on a ladder.
Call your Country Club Bank Capital Markets representative for ideas and service.
This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.
•Not FDIC Insured •No Bank Guarantee •May Lose Value