Asset Dedication Part V: Bond Investing Strategies
Currently, interest rates are very low; thus, government bond yields are nearly zero or pay almost nothing.
The advice is to keep duration as low as possible and invest in high-grade corporate bonds with short maturity.
The best bond investing strategy in a low rate environment is a ladder strategy. The length of the ladder should be as short as possible. For instance, the maturity range should be from one to five years.
If your dedicated portfolio of individual bonds is designed to last longer than five years, you simply roll over your ladder by investing in new bonds with a maturity of five years until the longest maturity of bonds in your portfolio is reached during the final year.
It is called a “continuous rolling horizon” approach.
Once the longest maturity of the ladder has reached the targeted month and year, you need to switch from a ladder strategy to bullet strategy.
The example in Table 7 shows that if you set your portfolio in 2017 for 10 years, you will switch from a ladder strategy to a bullet strategy in 2023.