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  Looks More Like A Step Stool Than A Ladder
Posted Under: Bond Market
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View from the Observation Deck

  1. A common strategy that income-oriented investors employ when they fear that interest rates may rise is to ladder bond maturities.
  2. The scenario we have presented in the chart is just one example of how one might approach it using Treasury bills and notes.
  3. The first three dates were selected based on the fact they were approximately one-month prior to the Federal Reserve initiating a tightening phase within its monetary policy.
  4. One of the takeaways from the chart is that each of the first three dates (1/31/94, 5/31/99 and 5/31/04) offered investors an average yield opportunity of 3.0% or higher.
  5. Why is this relevant? Since 1926, the average annual rate of inflation, as measured by the Consumer Price Index (CPI), has been approximately 3.0%.
  6. Today, the average yield utilizing this laddering strategy (2/28/13) is only 0.67%, well below the latest CPI reading of 1.6%.
  7. Investors willing to assume some measure of credit risk may want to consider other options in this climate.
To download a PDF of this post, click here.
Posted on Tuesday, March 5, 2013 @ 10:55 AM • Post Link Print this post Printer Friendly

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
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