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Updated August 4, 2024

Bond Investing Strategies

Bond strategies are methods in which investors can engage in bond investing based on their risk appetite and experience level

Maturity Based Strategies

There are a variety of bond investing strategies, depending on your investment goals, risk tolerance, and time horizon. One of the more basic bond strategies has to do with positioning maturities in a way that aligns with your risk profile.

Bond Ladder Strategy

This strategy involves investing in bonds with different maturities, so that as each bond matures, you can reinvest the proceeds into a new bond with a longer maturity. This can help you manage interest rate risk and ensure a steady stream of income. If interest rates rise, you can reinvest the the proceeds in another bond. Otherwise, you could use the money to invest in another higher-yielding asset.

Bond Barbell Strategy

This strategy involves purchasing bonds with short-term and long-term maturities, but no intermediate term maturities. Long-term bonds allow you to lock-in higher rates over the course of 10 to 30 years due to the prevalence of the risk factors involved. Additionally purchasing short-term bonds allow for liquidity over the course of the investment horizon to mitigate interest rate risk.

Bond Bullet Strategy

This strategy requires you to have a better idea of when you need capital. With one terminal maturity date in mind, say 10 years from now, you can stagger bond purchases in line with that maturity to control for interest rate changes in that time period. This is great in a rising rate environment, but could lead to downside risk if rates fall.

Risk-Mitigating Strategies

Just like other forms of investing, bond investing also benefits from strategies such as diversification or active trading. The motivation for these strategies stem from an understanding of the risks involved in fixed-income investing. Bond investors face credit risk, call risk, inflation risk, interest rate risk, principal loss risk, as well as numerous other risks that are intertwined with the market. As you read these next few strategies, consider their role in risk mitigation.

Diversification

Spreading your investment across a range of bond types and maturities can help reduce risk. This can include investing in different sectors (such as corporate bonds, municipal bonds, or government bonds), as well as different credit ratings (such as investment-grade bonds or high-yield bonds).

Buy and Hold

This strategy involves purchasing bonds with the intention of holding them until maturity. This can be a good option if you are looking for a predictable income stream and are not as concerned about capital gains.

Active trading

This strategy involves buying and selling bonds in response to changes in the market, with the goal of generating returns. This can be a higher-risk strategy, as it requires more knowledge and expertise in the bond market.

Duration matching

This strategy involves matching the duration of your bond portfolio to your investment time horizon. For example, if you have a long-term investment horizon, you may want to invest in longer-term bonds with higher yields. If you have a shorter-term horizon, you may want to invest in shorter-term bonds with lower yields.

Income-oriented

This strategy focuses on generating a consistent income stream from bond investments. It may involve investing in bonds with higher coupon rates or dividend yields, or in bonds issued by companies or governments with a history of consistent income payments.

Yield-curve Positioning

This strategy involves adjusting your bond portfolio to take advantage of changes in the yield curve. For example, if the yield curve is steep (meaning there is a large difference between short-term and long-term yields), you may want to invest in longer-term bonds. If the yield curve is flat (meaning there is little difference between short-term and long-term yields), you may want to focus on shorter-term bonds.

Credit Quality

This strategy involves investing in bonds with varying levels of credit risk, depending on your risk tolerance and investment goals. For example, you may want to invest in higher-quality investment-grade bonds if you prioritize capital preservation, or in lower-quality high-yield bonds if you are willing to take on more risk for potentially higher returns.

Tactical allocation

This strategy involves adjusting your bond allocation in response to changes in the market or economy. For example, you may want to reduce your exposure to bonds if you expect interest rates to rise, or increase your exposure to bonds if you expect a recession.

It's important to note that these strategies are not mutually exclusive, and you can use a combination of them to meet your investment goals. Additionally, it's important to consult with a financial advisor to ensure that any investment strategy aligns with your overall financial plan and risk tolerance.

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