Bond Ladders and the Yield Curve: Reading What Treasury Rates Are Saying

Two ideas finish this series: a way to build a bond portfolio so you're never forced to sell at a bad time, and a picture of what the market is saying about rates. This is Part 6 of our Bonds, Explained series.

The yield curve

Investor.gov's glossary defines the yield curve as a line graph that shows the relative yields on debt over a range of maturities, from three months to 30 years. FINRA adds that a typical yield curve is upward sloping, meaning securities with longer holding periods carry higher yields, as FINRA notes.

Reading the Treasury's October 8 data, the curve was upward sloping: from 4.23% at three months to 5.22% at 10 years, a gap of about one percentage point. The 10-year yield was 0.47 percentage points above the 2-year. The 20-year, at 5.64%, was slightly above the 30-year at 5.60%, a small bump at the long end. The Treasury's data is derived from indicative closing bid prices on Treasury securities. Maturities on the chart are spaced evenly for readability, not to scale.

When the curve inverts

Treasury's interest rate FAQ notes that short-term rates can sometimes exceed longer-term rates, and it uses the term inverted yield curve for that situation. It reflects what the market is pricing for the future, and interpretations vary. We'll leave forecasts to economists: the curve is a description of today's prices, not a guarantee about what comes next.

The bond ladder

A bond ladder is a strategy, not a product. You split money across bonds that mature at staggered dates, so that something comes due on a regular schedule. When each rung matures, you reinvest the proceeds into a new bond at the long end of the ladder. The aim is to blend the benefits of different maturities and to have cash arriving at predictable times.

*Simple arithmetic on par yields, not a forecast or an offer. Actual returns depend on the prices you pay and on interest paid on notes versus the discount on bills. The blended yield is the simple average of the four yields.

What a ladder does well, and what it doesn't

• Cash on a schedule. With a rung coming due every year or two, you aren't forced to sell early to meet a need.
• Less timing pressure. You reinvest gradually, so you aren't betting everything on today's rates. If rates rise, maturing rungs roll into higher yields. If they fall, the longer rungs you already own keep their higher rates.
• Interest rate risk is smoothed, not removed. Prices of the longer rungs still move if you sell before they mature. Holding to maturity avoids a realized loss.
• It takes more work than a single bond fund. You manage several purchases and reinvestments. Funds are simpler but, as FINRA notes, behave differently from individual bonds.

A ladder isn't the right tool for everyone. It fits people who know roughly when they'll need money, which is why it appeals to retirees drawing income. Your own timeline and tax situation decide whether it makes sense.

Common questions

What is a bond ladder?

A bond ladder is a portfolio of bonds with staggered maturity dates. As each bond matures, the proceeds are typically reinvested in a new long-dated bond, so the ladder keeps rolling and provides cash at regular intervals.

What is the yield curve?

It's a line graph showing the yields of bonds of the same type, usually U.S. Treasuries, across different maturities. A typical curve slopes upward, with longer maturities paying higher yields.

What does an inverted yield curve mean?

It means short-term rates are higher than long-term rates, the opposite of the typical pattern. It describes market prices at a point in time and is not a guarantee of any future outcome.