Good morning!

Last week, I shared my outlook for the rest of 2025.

Today, I want to build on that by walking through three distinct bond strategies investors can use as part of their overall strategy to navigate today’s uncertain market.

Bonds naturally carry less short-term volatility than stocks. And when risk/reward ratios become less favorable, bonds can offer a steadier path — while still providing the potential for real, inflation-beating growth over time.

Let’s break down these three strategies and explore how they could fit into the current environment.

3 Advanced Bond Strategies for the Savvy Investor

Let’s examine a hypothetical scenario.

Last week, I discussed that (in my opinion), I believe markets are most likely to improve by the end of this year. But that doesn’t mean they will. And I think the risk-reward ratio is not as favorable this year as it has been during the past couple of years.

So for those less inclined to take on risk, let’s examine three types of advanced fixed income strategies:

🪜 Bond Ladders

🏋️ Barbells

🚅 Bullets

Today, I want to unpack these strategies, explain how they work, and explore which might offer the best positioning if medium-term rates were to fall faster than long-term rates in the months ahead due to stagflation concerns.

1️⃣ The Bond Ladder

A bond ladder spreads investments evenly across a range of maturities. For example, an investor might buy bonds maturing in one, two, three, four, and five years. As each bond matures, they reinvest the proceeds at current rates on the long end of the ladder.

For example, when the 1-year bond matures, the investor reinvests the money back into a 5-year bond.

Advantages:

• Smooths reinvestment risk over time

• Steady cash flow

• Low volatility, as you're never entirely exposed to one interest rate segment

Ideal Market Environment:
In uncertain, sideways, or modestly rising rate environments

2️⃣ The Bullet Portfolio

A bullet strategy concentrates all bond maturities around a specific target date. Say, five years from now. An investor buys bonds of varying terms, but they all mature roughly at the same time.

Advantages:

• Maximizes return potential if rates fall between now and the maturity date

• Useful for funding a known liability at a specific point in time

• Especially powerful if the investor commits to holding the bonds to maturity

Ideal Market Environment:
When the investor expects falling interest rates between now and the maturity date, or at least not significantly rising interest rates. If held to maturity, then the movement of interest rates doesn’t matter, except for any opportunity cost of missing out on higher rates.

3️⃣ The Barbell Portfolio

A barbell strategy divides capital between short-term and long-term bonds, skipping the middle. For instance, an investor might buy 50% in one-year bonds and 50% in 15-year bonds.

Advantages:

• The short bonds provide liquidity and flexibility to reinvest as rates change

• The long bonds lock in higher yields for longer, offering price appreciation if rates fall

• The strategy tends to carry higher convexity — meaning it benefits more when rates fall than it gets hurt when rates rise by the same amount.

Ideal Market Environment:
In volatile, uncertain, or falling rate environments with significant shifts in interest rates relative to each other on a maturity chart (known as the “yield curve”).

📉 So — Which Strategy Fits an Environment Where Medium-Term Rates Fall First?

If we’re heading into a period where (this is my personal speculation):

• Medium-term rates (3–7 years) could drop faster than short or long rates

• Long rates may fall but potentially not as much

• And volatility remains a factor

Then the strategy to seriously consider is a modified barbell.

📊 Why a Modified Barbell Might Make Sense

A classic barbell ignores the middle of the curve. But in a scenario where medium-term rates may be poised to fall the fastest, an investor might choose to:

• Weight more heavily toward 3–7 year bonds now to capture the potential price appreciation as yields drop

• Keep a portion in short-term bonds (1 year or less) to maintain flexibility in case rates don’t fall as expected or even rise to fight renewed inflation

• Keep a portion in long-term exposure (7+ years), more or less depending on whether long rates offer an attractive yield premium well above medium-term — because in this scenario, they might not drop as much as the medium-term rates

This creates a modified barbell.

More medium-term, some short, and some long — to position for capital gains while preserving liquidity.

What about a pure bullet strategy?
A bullet could also work here since it concentrates maturities in the 3–7 year range. But a bullet also takes on added risk for its potential reward. If interest rates don’t drop but simply stay relatively level, the investor is giving up the opportunity cost of not owning a higher-paying long-term bond — if long rates remain meaningfully higher than medium-term or short-term yields. Or if interest rates actually rise in that maturity range, they risk price volatility greater than a strategy that also includes short-term bonds. This is more geared toward risk-seeking investors.

What about a laddered strategy?
A ladder could work here as well, but this is more appropriate for those who want to limit risk further by spreading across maturities about equally. This is not trying to take advantage of any particularly maturity range, not attempting to make guesses about where interest rates are going. It’s simply diversifying, improving the likelihood of greater stability in the portfolio. This is more for risk-averse investors (although there is still risk). 

📈 Key Takeaways

• If an investor is risk-averse and prefers predictable cash flow, a ladder is a solid, steady choice.

• If an investor is convinced medium-term rates are falling soon, a bullet in the 3–7 year zone captures that move best, though with added risk of being wrong.

• If an investor wants capital appreciation on potentially falling medium-term rates while still maintaining some diversity to level out risk, a modified barbell offers an excellent balance.

  

🙋‍♂️ Why Does This Matter?

Depending on goals, time horizon, risk tolerance, and investment experience, an investor may have their entire portfolio in bonds or only a portion.

Regardless, these strategies can be used for the bond portion of any portfolio that has access to either individual bonds or bond funds (mutual funds or ETFs).

The difference with using funds is that the funds themselves won’t have a maturity date. Instead, they will have what’s called duration. Duration is not the same thing as maturity, but investors can use duration in a similar way when thinking about using ladders, barbells or bullets.

Why does this matter?

Think about the S&P 500 ETF (SPY).

According to Yahoo Finance, its 3-year standard deviation is 16.62 as of this writing. Think of that as a measure (though imperfect) of past risk in terms of volatility.

Now let’s pick a bond ETF: let’s examine Vanguard Total Bond Market (BND). According to the same source, its 3-year standard deviation is 7.23 as of this writing.

Allocating 50% to SPY and 50% to BND makes for an overall portfolio standard deviation close to about 11.9. This isn’t a precise calculation, as true portfolio standard deviation depends on the correlation between asset classes, but it illustrates that blending bonds into a stock portfolio reduces overall volatility.

What does this result mean?

It means, while there are still going to be market moves up and down, these swings are not likely to be as dramatic as an all-stock portfolio.

This is important in market environments where downside potential is more likely than upside potential, or where likelihood of downside magnitude is greater than likely upside magnitude.

💭 Final Thoughts

In the current environment, I personally hold the opinion that the end of 2025 will be higher than it is now. But in the event that I’m wrong, I think the potential downside magnitude is greater than the potential (healthy) upside magnitude through the end of the year.

And that’s a reason for risk averse investors to use caution.

That’s where these bond strategies can help reduce short-term risk while also providing earning potential for real growth in purchasing power over time.

Daniel Lancaster, CFA

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