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Structuring Techniques for Bond Portfolios

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Release Date: October 14, 2020
Participants: Natalie Regan, Scott Carrithers
Topic: Bond Portfolio Strategies

Click here to listen now, or read the transcript below:

Scott Carrithers:

Welcome to the latest installment of The Leaderboard Report. I’m Scott Carrithers, managing director for Country Club Bank’s Capital Markets Group.

In today’s Leaderboard Report, we will hear from Natalie Regan, who will be discussing two structuring techniques for bond portfolios.

Natalie Regan:

Thank you, Scott.

As an Investment Officer with Country Club Bank’s Capital Markets Group, I work with financial institutions providing profitable strategies and solutions for fixed income portfolios.

Today, I will be reviewing two structuring techniques for bond portfolios: The Ladder and The Barbell. 

Each technique represents a strategy for a certain need or conviction on the direction of interest rates. Within our organization, we deploy a strategy of investing in plain vanilla options in our portfolio, and we work with our clients in doing the same. 

Both the ladder and the barbell can be curated with safe and sound products from several different sectors of the bond market.

Let’s begin by looking at the laddered approach. Much like the ladder you have in your garage, there is a beginning and an end—with evenly staggered rungs in between. 

Each step on a bond ladder extends in maturity. Spreading bond investments out over time gives the portfolio more flexibility in the future, with different bonds maturing at different intervals—and in different times of the rate cycle. 

Stated differently, this prevents a large sum of money being stuck in one bond or single maturity. 

As an example, for a $50 million portfolio, using a 10-year ladder, $5 million would be incrementally spread out between one and 10-year maturities. As each bond or bonds come due at the designated maturity, the portfolio manager then has the opportunity to use or re-invest the funds into new bonds at prevailing market rates.

This approach is a good way for a portfolio manager to diversify the bond portfolio and increase liquidity, since at least one security is likely close to maturity.

A less robotic approach is the barbell strategy. This strategy is meant to structure the portfolio in a way that takes advantage of the best aspects of short- and longer-term bonds.

Short-term investments provide more liquidity and flexibility, and long-term investments are typically higher yielding. 

If a barbell strategy is used and interest rates start to rise, the short-term, more liquid holdings, give the portfolio manager the ability to deploy those funds into higher yielding bonds.

The long-term bonds, having higher yields, provide a consistent flow of income over the life of the bond. Short-term options include, but are not limited to, Treasuries, Agency Bullets, CDs or Short duration Mortgage Backed Securities.

Based on current interest rates and possible direction of rates, we believe either a short-term ladder or barbell approach offer solid options for financial institutions. 

For a short-term ladder, look to evenly distribute funds into short CDs, US Treasuries, Agency Bullets, Municipals or Short Duration Mortgage Backed Securities. 

For institutions interested in a barbell, look to longer term municipals with a minimum of an 8-year call date for yield and for short-term liquidity consider treasuries, agency bullets and short average life 10- and 15-year mortgage-backed securities.

These strategies take time to develop and patience to reap the benefits, but implementing a strategy, and watching after the bond portfolio with intention, will pay dividends in the long run. 

Thank you for your time today. Feel free to reach out to your investment officer to discuss your portfolio strategy and options that will serve your institution well.



This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposed only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.


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