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Friday, February 24, 2023
Manage your Cash flow with T-bill ladder!
*Trading in financial market carries risk and can result in loss of capital.
*This performance is only observed with historical backtests and not traded by the company.
The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.
What is Bond Ladder?
Laddering bonds is a strategy that involves investing in bonds with difference maturity dates to spread out risk and take advantage of changing interest rates.
There are several reasons why you may want to consider laddering bonds:
Reduce interest rate risk: When interest rates rise, the value of existing bonds falls. By investing in bonds with difference maturity dates, you can reduce the risk of your entire portfolio losing value due to rising interest rates.
Ensure cash flow: If you need a regular stream of income from your bond portfolio, laddering can help ensure that you have a steady stream of cash flow. By investing in bonds that mature at different times, you can ensure that you have access to funds as each bond matures.
Increase flexibility: Laddering provides flexibility by allowing you to adjust your portfolio to take advantage of changing market conditions. For example, if interest rates rise, you can reinvest the proceeds from a maturing bond in a new bond with a higher yield.
Overall, laddering bonds is a prudent strategy for managing risk and ensuring a steady stream of income over the long term. By diversifying your bond holdings and spreading out maturities, you can reduce risk, increase flexibility, and maximize returns.
*above margin requirement is on IBKR platform
Creating a stream of income with Bond Ladder
Data Source: Bloomberg
Short-term bond yields tend to be more influenced by the federal funds rate than long-term bonds
Not all yields move in tandem with the federal funds rate. As illustrated in the chart below, yields for very short-term bonds, like six-month Treasuries, are highly correlated to the federal funds rate, meaning they tend to move in the same direction at the same time. As the Fed increases rates, short-term rates are very likely to move higher as well. However, longer-term bonds, like the 10-year Treasury, are less influenced by the fed funds rate. As inflation is yet above the Fed’s 2% target rate, market expects the Fed to continue its hiking above 5% and keep them there until at least beginning of 2024.
Data Source: Bloomberg
Data Source: Bloomberg
Bond Ladder Portfolio
|Issuer Name||ISIN||Maturity||Yield to Maturity
|United States Treasury Bill||US912796V482||20/04/2023||4.69||4.51||99.20|
|United States Treasury Bill||US912797FN27||13/06/2023||4.85||4.68||98.47|
|United States Treasury Bill||US912796Z368||17/08/2023||4.99||4.78||97.57|
|United States Treasury Bill||US912796YJ21||05/10/2023||4.87||4.60||97.04|
|United States Treasury Bill||US912796ZN24||28/12/2023||4.89||4.61||95.96|
|United States Treasury Bill||US912796ZY88||25/01/2024||4.94||4.68||95.53|
Estimated ask price has been calculated by taking into account the discount quoted and the maturity.
Data Source: Bloomberg
Bond Rating Scale:
Source: Moody’s, S&P and Fitch.
Risks and Assumptions for Back-tested trading strategies
Data Source: Bloomberg
Arun Leslie John
Chief Market Analyst
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