The term fixed income strategy refers to several options an investor has when purchasing securities such as bonds. The three primary fixed income strategies include ladders, barbells, and bullets.
Investors have several strategies they can use when purchasing fixed income securities such as bonds. Each of these strategies supports a different investment objective through the purchase of securities with various maturity dates. While under certain conditions the investor may choose a hybrid approach, the three principal fixed-income strategies include:
- Bullet Strategy: involves the purchase of fixed income securities that mature in the same timeframe. This strategy is oftentimes used by investors that need funds on a known date in the future.
- Barbell Strategy: involves the purchase of fixed income securities with both long and short term maturities. This strategy typically applies to bonds, and is thought to provide the investor with a portfolio that balances risk and reward. The best time to employ the barbell strategy is when interest rates are on the rise. The long-term bonds will provide the investor with a stable source of income, while the short-term bonds allow the investor to capture higher rates of interest.
- Bond Laddering: involves the purchase of fixed income securities with dissimilar maturity dates. By dividing a portfolio among a series of bonds with varying maturities, the investor can minimize interest rate risk and increase their portfolio's liquidity. Laddering is achieved by purchasing a series of bonds evenly spaced across the investor's desired liquidity timeframe.
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