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Chapter 13 of 15
Laddering, barbell, bullet, and advanced analysis
10 min read
How do professionals build and analyze bond portfolios?
1. Laddering Strategy
Spread investments across multiple maturities. Example: Equal amounts in 2Y, 5Y, 10Y, 15Y, 20Y. Benefits: Reduces reinvestment risk, provides liquidity at regular intervals.
2. Barbell Strategy
Concentrate in short and long maturities, skip the middle. Example: 50% in 2Y Schatz, 50% in 30Y Bunds. Benefits: Higher yield from long end, liquidity from short end.
3. Bullet Strategy
Concentrate all holdings around a single maturity. Example: All bonds maturing in 2030 ± 1 year. Use case: Matching a specific liability or goal date.
Advanced Metrics
| Metric | Definition | Use Case |
|---|---|---|
| Spread Duration | Sensitivity to credit spread changes | Corporate bond risk |
| Key Rate Duration | Sensitivity to specific points on the curve | Curve positioning |
| OAS | Option-Adjusted Spread over risk-free curve | Callable bond valuation |
| Z-Spread | Constant spread added to each point on spot curve | Relative value comparison |
Duration Matching
Match portfolio duration to investment horizon. This immunizes against parallel yield curve shifts. Common for pension funds and insurance companies.
Relative Value Analysis
Compare similar bonds to find mispricing. Example: Two BBB-rated German corporates with similar maturity. If one yields 20 bps more with same risk, it may be undervalued.
Credit Analysis
SAMPLE €100,000 PORTFOLIO
• €30,000 in 2Y Schatz (safety, liquidity) • €40,000 in 10Y Bund (core position) • €20,000 in German investment-grade corporates (yield enhancement) • €10,000 in inflation-linked Bunds (inflation protection) Portfolio duration: ~6 years Weighted average yield: ~2.9%
KEY TAKEAWAY
Professional bond investing is about managing duration, credit, and curve exposure—not just picking high-yielding bonds.