Fixed Income Reporting: Maturity Ladders

Fixed Income Reporting: Maturity Ladders

In Fall 2024, interest rates and bond yields increased notably, driving investor interest in fixed income investment tools like maturity ladders. Successfully managing maturity ladders for large portfolios – family offices, RIAs, foundations, and not-for-profit organizations – requires comprehensive, robust fixed-income investment reporting functionality.

Bond Ladders

As a reminder, a maturity ladder is a strategy that involves purchasing multiple financial products with different maturity dates to ensure a steady cash flow (as each investment matures at different intervals) and reduce interest rate risk by reinvesting the proceeds from maturing financial products into new ones at current interest rates. A bond ladder is a popular maturity ladder strategy for investors seeking income stability.

In a bond ladder, investors buy a series of bonds with different maturity dates, such as 1, 2, 3, 4, and 5 years. As each bond matures each year, the principal is returned to the investor to either spend the proceeds or reinvest in a new bond, typically at the far end of the ladder (e.g., a new 5-year bond). This keeps the ladder rolling forward, providing ongoing income and managing interest rate risk.

For example, if an investor has $100,000 to invest, they can build a 5-year bond ladder by investing $20,000 in each bond. The bonds mature in the following years:

• $20,000 bond matures in 1 year
• $20,000 bond matures in 2 years
• $20,000 bond matures in 3 years
• $20,000 bond matures in 4 years
• $20,000 bond matures in 5 years

Each year, as a bond matures, the investor can reinvest that $20,000 in a new 5-year bond, continuing the cycle of having a bond mature each year. The portfolio remains diversified across interest rates.

Maturity Ladder Reporting Essential to Manage Complicated Bond Ladders

While the above example is easy and straightforward, with one bond maturing each year, a bond ladder strategy for a family office, foundation, or not-for-profit organization would be much more complicated, likely involving a dozen or more bonds with different interest rates each maturing at different times. There could be a dozen bonds maturing in 2025, but each one matures on a different date with different yields, and the reinvestment interest rates will likely vary throughout the year. Investment managers need to analyze each bond individually and as part of the portfolio to carefully ensure returns while balancing risk.

• Investment managers choose bond ladders to help mitigate interest rate risk, since the bonds all have different maturities, and potentially different issuers, ensuring investors do not have their entire portfolio with one issuer, interest rate, or maturity date. Long-term bonds are locked into a specific interest rate, so rising interest rates will reduce the value of those long-term bonds. However, when interest rates rise, the investor can reinvest the proceeds of shorter-term bonds into new 5-year bonds at the higher rates. This reduces the negative impact of rising rates on the portfolio, because the new bonds are now invested at the higher rate. Timing reinvestment depends on the overall bond portfolio, so the investment manager needs to review the entire ladder to determine the correct strategy as each bond matures.
• The ladder provides a steady income stream once the bonds start maturing, enabling the client to use the principal and interest if they need it or reinvest some or all of it in new bonds to maintain stable cash flow from the continuation of the bond ladder. A careful review of the client’s cashflow requirements, future bond maturities, and interest rates is required to determine when and what to reinvest.
• Bond ladders also come with risk. If interest rates fall when a bond matures, investors might have to reinvest at lower rates, reducing future income. If inflation is high, the fixed income from bonds may not keep up with inflationary pressure, especially over long periods. Lower bond proceeds could leave investors facing financial difficulties. There is some risk of bond issuers defaulting, so it is critical that investors analyze available bond options and choose the bonds that provide the right balance of return and risk based on their risk tolerance.
  • • Government Bonds are treasuries or municipal bonds that are considered low risk. There is virtually zero risk investors will lose principal by investing in US government bonds.
    • Corporate Bonds offer higher yields but come with higher credit risk. If a company defaults on their debt, investors can lose their investment.
    • Municipal Bonds are often used for tax advantages, especially for HNWI. The return of principal and interest is not guaranteed, and high yield municipal bonds can be risky.

GreenHill Maturity Ladder Reporting