Bullet Strategy
Bullet Strategy
A bullet strategy concentrates all bond holdings in a single maturity date, offering the highest yield for that maturity and minimal reinvestment decisions, at the cost of inflexibility when the bond matures.
Key takeaways
- Buy all bonds to mature on the same date (e.g., all 10-year bonds maturing in 2034). This is the simplest possible bond structure.
- You capture the full yield of that maturity (no averaging across lower-yielding shorter bonds, as in a ladder).
- When the bullet matures, you must redeploy all capital at once into new bonds or assets.
- Bullets work well for specific, known liabilities (college funding, house payoff) that align with the maturity date.
- Least flexible of all strategies; not suitable for investors who need ongoing income or optionality.
The appeal of simplicity
A bullet eliminates reinvestment complexity. You pick a maturity (e.g., 10 years), buy all bonds at that maturity, hold to maturity, and collect the full coupon stream.
100,000 dollar bullet (all 10-year bonds at 5% yield):
| Year | Coupon | Principal |
|---|---|---|
| 1–10 | 5,000/year | None |
| 10 | None | 100,000 |
You receive 5,000 dollars every year for 10 years, then 100,000 dollars at maturity. Total received: 150,000 dollars.
Compare to a 5-rung ladder requiring reinvestment decisions every 2 years, or a barbell requiring annual rebalancing. The bullet requires zero active management until year 10.
Types of bullets
Short bullet (1–3 years):
- All bonds mature in 1–3 years.
- Yield: ~4.0–4.2% (lower).
- Use: Investors who need capital in the short term; ultra-conservative approach.
Intermediate bullet (5–7 years):
- All bonds mature in 5–7 years.
- Yield: ~4.3–4.6% (moderate).
- Use: Investors funding a specific intermediate goal (car purchase, home renovation).
Long bullet (10–20 years):
- All bonds mature in 10–20 years.
- Yield: ~4.6–5.0% (higher).
- Use: Investors funding long-term goals (college, retirement, pension-like payoff).
Ultra-long bullet (20–30+ years):
- All bonds mature in 20–30+ years.
- Yield: ~4.8–5.2% (highest).
- Use: Institutional investors, endowments, or individual investors with very long horizons.
Building a bullet: choosing the maturity
The maturity should align with your liability or goal.
Example 1: College funding Your child is born in 2026. You want 200,000 dollars when they turn 18 in 2044 (18 years from now). Build an 18-year bullet: invest in 18-year bonds (or a blend of 16- and 20-year bonds) maturing around 2044. Collect coupons and principal on schedule.
Example 2: Mortgage payoff You plan to pay off a 300,000 dollar mortgage in 12 years (2036). Build a 12-year bullet: invest in 12-year bonds, collect coupons, and use principal + coupons to pay off the mortgage in 2036.
Example 3: Fixed-date pension substitute You plan to retire at 65 in 2041 (17 years away). You want a steady income stream from age 65–90. Build a 17-year bullet to cover age 65–82 (immediate income), plus a secondary 25-year bullet to cover ages 82–90 (deferred income, purchased now but maturing later).
Bullet construction options
All government bonds (safest):
- Buy 100,000 dollars in 10-year Treasury bonds (CUSIP or through TreasuryDirect).
- Zero default risk. Highest credit quality.
- Lowest yield (4.0–4.5% for Treasuries).
All corporate bonds (higher yield, credit risk):
- Buy 100,000 dollars in 10-year investment-grade corporate bonds (A or BBB rated).
- Coupons typically 0.5–1.0% higher than Treasuries.
- Default risk: Roughly 1 default per 200 BBB bonds over 10 years.
All municipal bonds (tax-advantaged):
- Buy 100,000 dollars in 10-year municipal bonds (from your state, if possible).
- Coupon is federally tax-free (state tax-free if in-state).
- Effective yield for a 32% tax-bracket investor: 3.5% muni coupon = 5.1% after-tax.
Blended bullet (diversified):
- 40,000 in Treasury bonds.
- 40,000 in A-rated corporate bonds.
- 20,000 in municipal bonds.
- Average yield: ~4.6%. Diversified credit exposure.
Bond fund bullet (simplified):
- 100,000 in a target-date bond ETF (e.g., iShares iBonds 2034 ETF). This fund holds bonds maturing around 2034 and is managed to align with that date.
- No selection of individual bonds. Instant diversification.
- Annual expense ratio: ~0.05%.
The fund approach is simpler for most investors (no individual bond selection) but has a small ongoing cost. Individual bond approach requires homework but has no annual fees.
The reinvestment problem at maturity
A bullet's primary weakness is the reinvestment cliff: when all bonds mature on the same date, you have a large lump of capital to redeploy.
Scenario: Your 10-year bullet matures in 2034, returning 110,000 dollars (principal + reinvested coupons).
At that moment, you need to decide:
- Reinvest in a new bullet (another 10-year bullet now matures in 2044).
- Buy a barbell or ladder (more flexibility).
- Buy stocks (if you need growth).
- Spend the money.
If rates have fallen dramatically since 2024, the new 10-year bonds in 2034 may yield only 2%, disappointing. If rates have risen, the new 10-year bonds may yield 6%, delightful. You are timing the market whether you like it or not.
Ladder vs. bullet for managing reinvestment
A ladder is specifically designed to avoid this problem. Instead of one massive reinvestment event every 10 years, you have small reinvestment events every 1–2 years. This spreads your reinvestment risk.
| Approach | Maturity | Reinvestment Events | Timing Risk |
|---|---|---|---|
| 10-year bullet | 10y | 1 event at year 10 | High (rates may have changed dramatically) |
| 5-rung ladder (2,4,6,8,10y) | Mixed | 5 events (years 2,4,6,8,10) | Lower (rates change gradually) |
For investors who are loss-averse or uncomfortable with timing risk, a ladder is better. For investors who have a specific, known liability on a specific date, a bullet is perfect.
Matching a bullet to a liability
The ideal bullet matches a known obligation.
College payoff example: Suppose a 10-year-old has 12 years until college (age 22). You estimate college costs at 150,000 dollars. Build a 12-year bullet: invest 150,000 dollars today in 12-year bonds. In 12 years, you have 150,000 dollars + coupons. The principal covers college; coupons are a bonus.
But what if college costs rise faster than inflation? Or if your child does not attend college? The bullet is inflexible. You could:
- Overshoots: Invest 160,000 dollars (10% extra buffer).
- Undershoot: Invest 140,000 dollars and supplement with savings from cash flow during those 12 years.
Most investors do a hybrid: 80% funded by a bullet, 20% funded by annual savings leading up to college. This gives flexibility if needs change.
Tax treatment of bullets
In a taxable account:
- Coupon income is taxed annually as ordinary income.
- If bought at a discount (e.g., a bond with a 4% coupon in a 5% market yields less than par), the difference is taxed as a capital gain at maturity (either all at once or amortized annually, depending on tax rules).
- If held in a tax-deferred account (IRA, RRSP), no annual tax; you pay tax on withdrawals.
Optimal bullet placement:
- Taxable account: Buy Treasuries or municipals (lower ongoing tax drag).
- Tax-deferred account: Buy corporate bonds (higher yield, no ongoing tax consequence).
Real-world example: a 250,000 dollar bullet for retirement
You are 45 years old, plan to retire at 65 (20 years from now), and estimate you will need 250,000 dollars in liquid bonds at retirement to fund the first 10 years of retirement (via a subsequent bullet ladder).
Build a 20-year bullet: invest 250,000 dollars today in a mix of 20-year bonds. In 20 years, you have 250,000 dollars + 20 years of coupons (roughly 5–6% per year, or 50,000–60,000 dollars total).
Proceed:
- Buy 100,000 in 20-year Treasury bonds (yield 4.8%).
- Buy 100,000 in 20-year investment-grade corporate bonds (yield 5.2%).
- Buy 50,000 in 20-year municipal bonds (yield 3.8%, equivalent to 5.4% after-tax).
Average yield: ~5.0%. Total coupons over 20 years: 250,000 × 0.05 × 20 = 50,000 dollars.
At retirement (year 20):
- Principal: 250,000 dollars.
- Coupons collected: 50,000 dollars.
- Total: 300,000 dollars.
The extra 50,000 dollars is a bonus, available to fund higher spending in early retirement or to reinvest for later years.
When a bullet works well
Ideal scenarios:
- You have a specific, known liability on a known date.
- You are risk-averse and prefer passive, buy-and-hold investing.
- You want the simplest possible bond structure.
- Your liability is medium-term (5–15 years).
- You can reinvest the proceeds at maturity (not critical; you are comfortable accepting new rates).
Poor scenarios:
- You need ongoing income (a ladder or barbell provides regular rebalancing and reinvestment).
- Your liability is uncertain or variable.
- Rates are at historic highs and you worry about reinvestment risk later (a ladder averages reinvestment timing).
- You need flexibility to withdraw or adjust; a bullet locks you in.
Bullet within a broader portfolio
Many investors use bullets as one component of a multi-goal portfolio:
- Bullet 1: 5-year, 100,000 dollars (covers age 65–70 retirement spending).
- Bullet 2: 10-year, 120,000 dollars (covers age 70–80 spending).
- Bullet 3: 20-year, 150,000 dollars (covers age 80–90 spending).
This is a "bullet ladder"—multiple bullets at different maturities, cascading payoffs. It combines bullet simplicity (each bullet is passive) with ladder-like reinvestment spreading.
When Bullet 1 matures at age 70, you use it for spending and may or may not reinvest (Bullet 2 has matured by then, providing new capital). This is less complex than tracking a single 40-rung ladder.
Next
Bullets and ladders are passive strategies: hold to maturity and reinvest coupons. The next strategy—immunisation—is more active: it matches the duration of your assets to the duration of your liabilities, protecting against interest-rate moves regardless of hold period.