Bond Ladder

A bond ladder is a portfolio strategy where you buy bonds with different maturity dates—one maturing each year, for instance. As each bond matures, you reinvest the proceeds in a new long-term bond, creating a steady stream of income and reducing the risk of reinvesting all your money at once.

Why ladders reduce timing risk

The chief advantage of a bond ladder is that it protects you against the risk of reinvesting a lump sum at an unfavorable time. If you own a single 10-year Treasury bond, you face reinvestment risk when it matures—rates might have dropped sharply, forcing you to reinvest the principal at lower yields. With a ladder, one bond matures each year. Even if rates have fallen, you’re only reinvesting a fraction of your portfolio each time, averaging out your entry points over a decade.

How to build a ladder

A simple 5-year ladder might look like this: buy five bonds maturing in 1, 2, 3, 4, and 5 years respectively. As each matures, you reinvest the proceeds in a new 5-year bond at the long end of the ladder. This keeps your portfolio’s duration relatively constant and your cash flow predictable.

Ladders work with any fixed-income instruments—Treasury bills, Treasury notes, government-issued bonds, or corporate bonds. Government bonds are popular for ladders because they’re liquid, transparent, and available at regular issuance schedules.

Income and flexibility

The staged maturity structure generates a predictable income stream. If you build your ladder to match future spending needs, you ensure capital is available when you need it—college tuition, a mortgage payment, or retirement withdrawals. This is sometimes called “matching duration” and is central to liability-driven investing.

The drawback is opportunity cost. If the yield curve is steep (long-term rates much higher than short-term), a ladder locks in lower yields on the short end while waiting for longer bonds to mature. In a flat or inverted curve, the benefit is smaller.

Ladder variations

A traditional ladder assumes equal spacing. A “barbell” approach buys only short and long bonds, skipping the middle—riskier but yields higher long-term returns if rates fall. A “bullet” strategy concentrates holdings in bonds maturing at a single date, accepting reinvestment risk in exchange for interest-rate risk clarity.

Some investors shift the ladder’s angle over time. As rates rise, new bonds enter the ladder at higher yields, gradually improving the overall return. As rates fall, the ladder becomes a performance drag, but your maturity dates still anchor income.

Practical considerations

Building a ladder by hand is tedious; Treasury Direct allows you to purchase individual government bonds directly, but you’ll need to manage each transaction separately. Many brokers offer ladder-building tools, though these typically come with commissions or bid-ask spreads on secondary-market bonds.

The ladder strategy assumes you can hold to maturity. Selling early, especially in a rising-rate environment, locks in losses—one reason some investors prefer buy-and-hold ladders for government bonds, where credit risk is minimal and you can simply wait.