October 23, 2024 • 13 mins
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How can investors seeking income plan for a future where bond yields are unknown? One solution is building a ladder of bonds that mature in different years to both lock in higher rates now (in case yields drop), and reinvest later (if rates rise). For more on the subject, Barry Ritholtz, speaks with Karen Veraa, Head of iShares US Fixed Income Strategy at BlackRock.
Each week, “At the Money” discusses an important topic in money management. From portfolio construction to taxes and cutting down on fees, join Barry Ritholtz to learn the best ways to put your money to work.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
We can predict the future. Over the past decade or
maybe even longer, no one's accurately predicted which way rates
(00:21):
were going. Are they gonna rise, are they gonna fall?
Are they're gonna stay steady. This creates a challenge for
bond investors, who are usually looking for a predictable income
stream from their fixed income holdings. One solution create a
ladder of bonds of different maturity rates, so that regardless
(00:41):
of what occurs, you have a predictable yield series. You
can lock in higher yielding paper if rates fall, but
you also free up more capital on an annual basis
if rates rise. I'm Barry rid Heltson on today's edition
of At the Money. We're going to show you how
to create a bond ladder to help us unpack all
(01:03):
of this and what it means for your fixed income portfolio.
Let's bring in Karen Vera is head of ice Shares
us fixed income strategy for investing Giant Blackrock. So let's
start simply, what is a bond ladder.
Speaker 2 (01:17):
A bond ladder is a simple tool for investing in
the bond market. You take your investing window, let's say
ten years, and you equally wait, every maturity across that
ten year period, so you've got bonds that mature in
one year, two year, three years, and so on. It's
a very popular strategy because, as you just mentioned, Barry,
you don't have to make bets on interest rate risk.
(01:39):
You kind of have your investing horizon and you've got
this more predictable stream of income as well as maturity
is coming do each year where you can make a
decision about going in the next run on the bond
ladder or doing something else with that money.
Speaker 1 (01:52):
We always seem to divide bond ladders into each rung
is the same equity amount. What's the thinking there.
Speaker 2 (01:59):
We do see that as being the most popular. It's
because you can think through that, I'm going to have
a certain amount of money. Let's say I've got one
hundred thousand dollars to invest and it's a ten year ladder.
I've got ten thousand coming do each year. You can
kind of think of it in chunks like that. We
do see some people who are laddering out amounts and
retirement accounts and they need to take those required minimum
(02:20):
distributions where they will look at the irs schedule of
how much they have to pull out of the account.
It's not quite equal, but you can even ladder out
those required minimum distributions. You know, it's about eight percent
instead of ten percent in the first year, for example,
and then you don't have to sell anything inside your
retirement account and you can just pull those out on schedule.
So that's another way that people weight their bond ladders
(02:41):
when they're seeking that goal of having those rmds coming
do every year.
Speaker 1 (02:44):
Let's talk about what goes into bond ladders. I'm assuming
a mix of US Treasury bonds, munis, investment grade corporates,
even high yielding CDs, anything else go into the mix
for bond ladders.
Speaker 2 (02:58):
I'd say the most popular tends to be the munis
and corporate bonds and the investment grade side. We offer
a suite of exchange traded funds that mature each year,
and they're primarily used to build bond ladders. We have
these in high yield as well for people who want
to go out and add a little bit more income
and credit risk of the portfolios. We also even have
them in the tips market. So these days you can
(03:19):
build a bond ladder using all these different asset classes.
I think some of the challenges with CDs is typically
they're limited in their term. They may only go out
up to five years, and sometimes the banks will have
restrictions or penalties if you want to sell them early
or try to get your money back early. So we've
seen people migrate away from CD ladders, doing it more
(03:40):
with bond and bondytfs to build these ladders.
Speaker 1 (03:42):
How to investors determine what their timeline is? I think
that's a pretty interesting choice, and most people just seem
to assume it's ten years. But from what I've seen,
there are a variety of timelines.
Speaker 2 (03:55):
I think people can think about it if they have
a liability that they're managing to or a a time
based goal. We see people sometimes building ladders let's say
three to seven years, because maybe they have a cash
portfolio for things the next couple of years, but then
they don't want to start their ladder out for a
few years. One to five tends to be the most
popular based on data that we have around assets in
(04:18):
those different account types. We rarely see people go out
past ten years. I do see people asking for fifteen
because I think with the bond ladder you can accomplish
most of your goals within that time horizon of having stability,
having income rolling it every year. We also see on
the corporate side, corporate issues will issue ten year bonds
and they might do a thirty year bond, but there's
(04:38):
not really that much paper that's actively being issued beyond
ten years. So what tends to happen is there's just
not that many new issues and it's hard to find
the bonds. So I think that's another reason why that
tenyure point tends to be the maximum for most people's ladders.
Speaker 1 (04:53):
We never know what yields will be in the future.
How can an investor lock in the best yields on
the ration curve today and benefit over the next decade
with their ladders.
Speaker 2 (05:03):
Well, we do have an inverted yield curve right now,
so we've seen a lot of people overweighting their ladders
in that one to two year bucket trying to maximize income.
Maybe they do might do an extra forty fifty percent
than what they would usually do, But I think one
of the nice things you can do now is try
to lock in the yields for the interim. We've been
telling people on the corporate side, you can get about
(05:25):
five percent by continuing to go out six to seven
percent for high yield, And so we're seeing people who
are doing that right now, knowing that when the FED
starts to cut rates, interest rates are going to come down,
and they want to put some of that cash to
work and consistently beginning four five six percent rather than
have it dissipate in those short term vehicles as soon
(05:45):
as interest rates go down.
Speaker 1 (05:47):
I continue to see people who are waiting for inflation
to reaccelerate. They're warning that the Fed is looking at
this incorrectly and that we should be expecting much higher
yield if that were to happen. Didn't someone who just
set up a bond ladder lock in low rates or
(06:07):
how does the ladder work in the face of that?
Speaker 2 (06:09):
So when I think about the ladder, it's going to
be a more known investment result than some other more
perpetual bond strategy. So you kind of know what your
yield's going to be over that period. You can do
a few things. You could use tips, so we have
for example, tips Term Maturity ETFs tips eebonds where you
can get protected for the inflation, but you also have
(06:30):
the periodic income payments kicking out the ladder that you
can reinvest at higher yields, which will add income over time.
And you also have that discrete point when something matures
this year, you can go and grab more income. So
what we see is as yields go up, you're slowly
walking that ladder up and recouping more of the income
over time.
Speaker 1 (06:48):
What about the opposite group of prognosticators, the ones who've
been forecasting the recession every year for the past three years,
that just hasn't showed up. If there's a recession and
rate rates fall pretty radically, what happens then what's our
reinvestment risk there?
Speaker 2 (07:04):
So if you've got your ladder locked in it today's
yields and yields come down, that ladder income stream is
worth more. So I'll actually the prices on the bonds
go up in that situation. But then you're right when
the money comes to you're going to be reinvesting at
lower rates, and then over time that will go down
a bit. If you are worried about a recession, I
would say go up in quality. Stick to Treasury's investment grade.
(07:25):
The higher quality, even MUNI is the higher quality asset
classes that you don't have to worry about as much
default risk and volatility if we do have a coming recession.
Speaker 1 (07:32):
I know you're the strategist for ey Shares, which issues
a lot of ETFs. When I first started in the
nineteen nineties, bond ladders were all individually owned papers and
separately managed accounts. Everything was hand selected, the minims were
pretty high, the cost structure was pretty high. The state
of the art stay that way for decades. It seems
(07:55):
to have gotten a whole lot better, cheaper, faster, easier today.
How what is the state of the art building a
bond ladder using ETFs.
Speaker 2 (08:04):
I think this is one of the innovations that has
really come about in the last decade. No longer do
you have to have a million dollars to create a
spoke bond ladder with an SMA manager. You can do
it today for very little amounts of money. And so
what we've seen is our EE bonds have been popular
inside smaller account sizes. If you've got one off account
(08:25):
over here, or even if you have a lot of money,
it's just a very efficient way to do that. So
our I bonds ETFs or term maturity ETFs, they have
a maturity date typically each December, and they're holding bonds
that mature throughout the calendar year, and then when the
last bond matures, the ETF will dlist from the exchange
and you'll have cash hitting you account just like a
bond maturity. And we've got them now in treasuries, tips, communis,
(08:50):
investment grade, and high yield, so five different sectors of
the bond market. And then we've seen people really customize
things for their income needs, for their tax status, and
they're getting exposed to hundreds of bonds in a single
ETF as opposed to what we see with a lot
of SMAs as they might be limited to maybe twenty
to thirty bonds at the most. So you're getting diversification
(09:13):
at a very low cost. And because they are exchange traded,
if you change your mind and want to sell them,
you can at any point where a lot of times
with the bond it's really easy to buy it, but
then maybe when you go to sell it it's hard
to find a buyer or there's large transaction costs associated
with that.
Speaker 1 (09:29):
So I'm hearing diversification, lower costs, liquidity. You mentioned they
all the ETF will mature at the end of the year,
so you have a defined maturity. Obviously, no callable bonds
go into that, but it seems working with an ETF
gives you I'm doing a little bit of a commercial here,
(09:50):
but my firm uses a lot of ETFs. We're very
happy with them. You get a lot of flexibility and
professional management. This really seems to be much better than
the battle days when someone was handpicking dozens of individual bonds.
Speaker 2 (10:05):
Yeah, we still see people who are preferring that. Like
let's say you have special you're in a high tech
state and you want a special SMA dedicated to that.
So we see people even using our eyebonds alongside sms
or alongside other strategies, or maybe they're whittling those down.
Like we don't tell people go out and sell your
bond portfolio. You're curated over decades. However, this is a
(10:28):
great strategy I think to provide some liquidity, diversification and
low cost access to these different parts of the bond market.
Speaker 1 (10:34):
One of the advantages of working with various large firms
like yourself, I Shares, Fidelity, Schwab, whoever. You have a
variety of online tools to build your own bond ladder
tell us a little bit about what people can find
if they want to just do it themselves.
Speaker 2 (10:51):
If you go to ihers dot com backslash eyebonds, you'll
find our landing page and there's a link to our
Eyebonds ladder tool. And we just find this to be
just like a report that you would get if you
went to a bond manager and asked for a bond ladder.
You can input your dollar amount, you can check the
box on which sectors of the bond market you want
(11:11):
to be invested in, and there's even a slider where
you can look at your maturities and right away it
will give you an equal weighted ladder. You can then
customize that ladder if you like. You can delete things
you don't want, and it will have some summary characteristics
the number of bonds, the duration, the yield, the cost,
and I think it's a great way to just visualize
those yields. Like we have people who will come in
(11:33):
and they want to know what different maturities of the
bond market are yielding. They can go in and look
in and see where the treasure curve is, the investment
grade curve, the highyield curve, and I think it's just
a great source of information to even go in and
see what the different parts of the market are yielding.
Speaker 1 (11:46):
So to sum up. Investors that are looking for yield
but are concerned about interest rates going up, down, and
all over the place can solve for that problem by
creating a ladder of bond ETFs, spreading it out of
five to ten years, so their interest rate risk is reduced.
They're locking in rates now, and if rates go higher
(12:07):
as things mature, they can reinvest it. And if rates
go down, hey, well at least you locked in a
higher rate for the first half of those investments. It
seems to make a lot of sense, and especially if
you're working towards a specific liability or a specific goal
where you have an obligation down the road, this allows
you with very little risk to hit those targets.
Speaker 2 (12:29):
That's right. We were seeing all kinds of investors using
them for different goals and objectives, different different terms, and
I think it really empowers people to do it themselves
and invest in the bond market.
Speaker 1 (12:41):
Thank you, Karen, This has been really interesting. I'm Barry Riddholts.
You've been listening to At the Money on Bloomberg Radio.
Sure Verti drive
We can predict the future. Over the past decade or
maybe even longer, no one's accurately predicted which way rates
(00:21):
were going. Are they gonna rise, are they gonna fall?
Are they're gonna stay steady. This creates a challenge for
bond investors, who are usually looking for a predictable income
stream from their fixed income holdings. One solution create a
ladder of bonds of different maturity rates, so that regardless
(00:41):
of what occurs, you have a predictable yield series. You
can lock in higher yielding paper if rates fall, but
you also free up more capital on an annual basis
if rates rise. I'm Barry rid Heltson on today's edition
of At the Money. We're going to show you how
to create a bond ladder to help us unpack all
(01:03):
of this and what it means for your fixed income portfolio.
Let's bring in Karen Vera is head of ice Shares
us fixed income strategy for investing Giant Blackrock. So let's
start simply, what is a bond ladder.
Speaker 2 (01:17):
A bond ladder is a simple tool for investing in
the bond market. You take your investing window, let's say
ten years, and you equally wait, every maturity across that
ten year period, so you've got bonds that mature in
one year, two year, three years, and so on. It's
a very popular strategy because, as you just mentioned, Barry,
you don't have to make bets on interest rate risk.
(01:39):
You kind of have your investing horizon and you've got
this more predictable stream of income as well as maturity
is coming do each year where you can make a
decision about going in the next run on the bond
ladder or doing something else with that money.
Speaker 1 (01:52):
We always seem to divide bond ladders into each rung
is the same equity amount. What's the thinking there.
Speaker 2 (01:59):
We do see that as being the most popular. It's
because you can think through that, I'm going to have
a certain amount of money. Let's say I've got one
hundred thousand dollars to invest and it's a ten year ladder.
I've got ten thousand coming do each year. You can
kind of think of it in chunks like that. We
do see some people who are laddering out amounts and
retirement accounts and they need to take those required minimum
(02:20):
distributions where they will look at the irs schedule of
how much they have to pull out of the account.
It's not quite equal, but you can even ladder out
those required minimum distributions. You know, it's about eight percent
instead of ten percent in the first year, for example,
and then you don't have to sell anything inside your
retirement account and you can just pull those out on schedule.
So that's another way that people weight their bond ladders
(02:41):
when they're seeking that goal of having those rmds coming
do every year.
Speaker 1 (02:44):
Let's talk about what goes into bond ladders. I'm assuming
a mix of US Treasury bonds, munis, investment grade corporates,
even high yielding CDs, anything else go into the mix
for bond ladders.
Speaker 2 (02:58):
I'd say the most popular tends to be the munis
and corporate bonds and the investment grade side. We offer
a suite of exchange traded funds that mature each year,
and they're primarily used to build bond ladders. We have
these in high yield as well for people who want
to go out and add a little bit more income
and credit risk of the portfolios. We also even have
them in the tips market. So these days you can
(03:19):
build a bond ladder using all these different asset classes.
I think some of the challenges with CDs is typically
they're limited in their term. They may only go out
up to five years, and sometimes the banks will have
restrictions or penalties if you want to sell them early
or try to get your money back early. So we've
seen people migrate away from CD ladders, doing it more
(03:40):
with bond and bondytfs to build these ladders.
Speaker 1 (03:42):
How to investors determine what their timeline is? I think
that's a pretty interesting choice, and most people just seem
to assume it's ten years. But from what I've seen,
there are a variety of timelines.
Speaker 2 (03:55):
I think people can think about it if they have
a liability that they're managing to or a a time
based goal. We see people sometimes building ladders let's say
three to seven years, because maybe they have a cash
portfolio for things the next couple of years, but then
they don't want to start their ladder out for a
few years. One to five tends to be the most
popular based on data that we have around assets in
(04:18):
those different account types. We rarely see people go out
past ten years. I do see people asking for fifteen
because I think with the bond ladder you can accomplish
most of your goals within that time horizon of having stability,
having income rolling it every year. We also see on
the corporate side, corporate issues will issue ten year bonds
and they might do a thirty year bond, but there's
(04:38):
not really that much paper that's actively being issued beyond
ten years. So what tends to happen is there's just
not that many new issues and it's hard to find
the bonds. So I think that's another reason why that
tenyure point tends to be the maximum for most people's ladders.
Speaker 1 (04:53):
We never know what yields will be in the future.
How can an investor lock in the best yields on
the ration curve today and benefit over the next decade
with their ladders.
Speaker 2 (05:03):
Well, we do have an inverted yield curve right now,
so we've seen a lot of people overweighting their ladders
in that one to two year bucket trying to maximize income.
Maybe they do might do an extra forty fifty percent
than what they would usually do, But I think one
of the nice things you can do now is try
to lock in the yields for the interim. We've been
telling people on the corporate side, you can get about
(05:25):
five percent by continuing to go out six to seven
percent for high yield, And so we're seeing people who
are doing that right now, knowing that when the FED
starts to cut rates, interest rates are going to come down,
and they want to put some of that cash to
work and consistently beginning four five six percent rather than
have it dissipate in those short term vehicles as soon
(05:45):
as interest rates go down.
Speaker 1 (05:47):
I continue to see people who are waiting for inflation
to reaccelerate. They're warning that the Fed is looking at
this incorrectly and that we should be expecting much higher
yield if that were to happen. Didn't someone who just
set up a bond ladder lock in low rates or
(06:07):
how does the ladder work in the face of that?
Speaker 2 (06:09):
So when I think about the ladder, it's going to
be a more known investment result than some other more
perpetual bond strategy. So you kind of know what your
yield's going to be over that period. You can do
a few things. You could use tips, so we have
for example, tips Term Maturity ETFs tips eebonds where you
can get protected for the inflation, but you also have
(06:30):
the periodic income payments kicking out the ladder that you
can reinvest at higher yields, which will add income over time.
And you also have that discrete point when something matures
this year, you can go and grab more income. So
what we see is as yields go up, you're slowly
walking that ladder up and recouping more of the income
over time.
Speaker 1 (06:48):
What about the opposite group of prognosticators, the ones who've
been forecasting the recession every year for the past three years,
that just hasn't showed up. If there's a recession and
rate rates fall pretty radically, what happens then what's our
reinvestment risk there?
Speaker 2 (07:04):
So if you've got your ladder locked in it today's
yields and yields come down, that ladder income stream is
worth more. So I'll actually the prices on the bonds
go up in that situation. But then you're right when
the money comes to you're going to be reinvesting at
lower rates, and then over time that will go down
a bit. If you are worried about a recession, I
would say go up in quality. Stick to Treasury's investment grade.
(07:25):
The higher quality, even MUNI is the higher quality asset
classes that you don't have to worry about as much
default risk and volatility if we do have a coming recession.
Speaker 1 (07:32):
I know you're the strategist for ey Shares, which issues
a lot of ETFs. When I first started in the
nineteen nineties, bond ladders were all individually owned papers and
separately managed accounts. Everything was hand selected, the minims were
pretty high, the cost structure was pretty high. The state
of the art stay that way for decades. It seems
(07:55):
to have gotten a whole lot better, cheaper, faster, easier today.
How what is the state of the art building a
bond ladder using ETFs.
Speaker 2 (08:04):
I think this is one of the innovations that has
really come about in the last decade. No longer do
you have to have a million dollars to create a
spoke bond ladder with an SMA manager. You can do
it today for very little amounts of money. And so
what we've seen is our EE bonds have been popular
inside smaller account sizes. If you've got one off account
(08:25):
over here, or even if you have a lot of money,
it's just a very efficient way to do that. So
our I bonds ETFs or term maturity ETFs, they have
a maturity date typically each December, and they're holding bonds
that mature throughout the calendar year, and then when the
last bond matures, the ETF will dlist from the exchange
and you'll have cash hitting you account just like a
bond maturity. And we've got them now in treasuries, tips, communis,
(08:50):
investment grade, and high yield, so five different sectors of
the bond market. And then we've seen people really customize
things for their income needs, for their tax status, and
they're getting exposed to hundreds of bonds in a single
ETF as opposed to what we see with a lot
of SMAs as they might be limited to maybe twenty
to thirty bonds at the most. So you're getting diversification
(09:13):
at a very low cost. And because they are exchange traded,
if you change your mind and want to sell them,
you can at any point where a lot of times
with the bond it's really easy to buy it, but
then maybe when you go to sell it it's hard
to find a buyer or there's large transaction costs associated
with that.
Speaker 1 (09:29):
So I'm hearing diversification, lower costs, liquidity. You mentioned they
all the ETF will mature at the end of the year,
so you have a defined maturity. Obviously, no callable bonds
go into that, but it seems working with an ETF
gives you I'm doing a little bit of a commercial here,
(09:50):
but my firm uses a lot of ETFs. We're very
happy with them. You get a lot of flexibility and
professional management. This really seems to be much better than
the battle days when someone was handpicking dozens of individual bonds.
Speaker 2 (10:05):
Yeah, we still see people who are preferring that. Like
let's say you have special you're in a high tech
state and you want a special SMA dedicated to that.
So we see people even using our eyebonds alongside sms
or alongside other strategies, or maybe they're whittling those down.
Like we don't tell people go out and sell your
bond portfolio. You're curated over decades. However, this is a
(10:28):
great strategy I think to provide some liquidity, diversification and
low cost access to these different parts of the bond market.
Speaker 1 (10:34):
One of the advantages of working with various large firms
like yourself, I Shares, Fidelity, Schwab, whoever. You have a
variety of online tools to build your own bond ladder
tell us a little bit about what people can find
if they want to just do it themselves.
Speaker 2 (10:51):
If you go to ihers dot com backslash eyebonds, you'll
find our landing page and there's a link to our
Eyebonds ladder tool. And we just find this to be
just like a report that you would get if you
went to a bond manager and asked for a bond ladder.
You can input your dollar amount, you can check the
box on which sectors of the bond market you want
(11:11):
to be invested in, and there's even a slider where
you can look at your maturities and right away it
will give you an equal weighted ladder. You can then
customize that ladder if you like. You can delete things
you don't want, and it will have some summary characteristics
the number of bonds, the duration, the yield, the cost,
and I think it's a great way to just visualize
those yields. Like we have people who will come in
(11:33):
and they want to know what different maturities of the
bond market are yielding. They can go in and look
in and see where the treasure curve is, the investment
grade curve, the highyield curve, and I think it's just
a great source of information to even go in and
see what the different parts of the market are yielding.
Speaker 1 (11:46):
So to sum up. Investors that are looking for yield
but are concerned about interest rates going up, down, and
all over the place can solve for that problem by
creating a ladder of bond ETFs, spreading it out of
five to ten years, so their interest rate risk is reduced.
They're locking in rates now, and if rates go higher
(12:07):
as things mature, they can reinvest it. And if rates
go down, hey, well at least you locked in a
higher rate for the first half of those investments. It
seems to make a lot of sense, and especially if
you're working towards a specific liability or a specific goal
where you have an obligation down the road, this allows
you with very little risk to hit those targets.
Speaker 2 (12:29):
That's right. We were seeing all kinds of investors using
them for different goals and objectives, different different terms, and
I think it really empowers people to do it themselves
and invest in the bond market.
Speaker 1 (12:41):
Thank you, Karen, This has been really interesting. I'm Barry Riddholts.
You've been listening to At the Money on Bloomberg Radio.
Sure Verti drive
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