Municipal Bond Forum
Long ladder
Q
You regularly write against laddering, justifying the position partly by saying that the typical ladder goes out only 10 years. However there is no reason to limit a ladder to 10 years. A ladder can go out 20 or 30 years. If that is done with an initial large sum, then as each group of bonds becomes due, they are replaced with bonds with the most distant maturities. If interest rates stay the same or fall, one will give up some return. However, one will have some protection in case there is a steep rise in interest rates. As we all agree that the future course of interest rates cannot be predicted with any accuracy, a steep rise in rates is a clear possibility. It seems to me that your recommended strategy – putting all funds in the longest maturities – is very risky for investors looking for a safe return. The fact that it would have worked well in the last 10 or 20 years is not meaningful when interest rate cycles tend to be much longer than 10 or 20 years. It is also worth noting that if one had a regular stream of funds (say, every few years) to invest, and followed your strategy of buying only long-term bonds, one would eventually end with a laddered portfolio.
A
James A. Klotz responds:
We have no quarrel with your suggestion. We are against the traditional 10-year ladder, which sacrifices 40% to 50% of the income available on 20- or 30-year bonds.
We agree that interest rate cycles usually last longer than 20 years. That is why we anticipate this current cycle of lower rates, which began in 1982, to extend much further into the future. Nevertheless, bond investors should not overlook the additional reinvestment dollars available on longer-term securities.
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