Bond Ladder vs. Bond Barbell: Which Strategy Works Best When Rates Rise?

With oil prices on the rise again, many investors are asking the same question: "What happens to my bonds if interest rates go up?"

As a financial advisor, I often encounter this concern. Rising oil prices can fuel inflation, and as a result, central banks may raise interest rates. When this occurs, bond prices usually decline, but not all strategies are impacted in the same way.

Let’s break down two popular approaches to bond investing: the Bond Ladder and the Bond Barbell, and why one of them may be more effective in a rising rate environment.

Bond Ladder vs. Bond Barbell: The Basics

Both strategies are used to manage interest rate risk and generate steady income, but they do it in different ways.

Bond Ladder

What It Is:

A bond ladder is a portfolio of bonds with staggered maturities — for example, 1, 2, 3, 4, and 5 years.

How It Works:

• You invest equal amounts in bonds that mature at regular intervals.

• As each bond matures, you reinvest the principal into a new bond at the end of the ladder (e.g., buy a new 5-year bond).

Key Advantages:

• Diversifies interest rate risk over time.

• Provides predictable income and liquidity at regular intervals.

• Works well in uncertain or rising rate environments (you reinvest at higher rates as they mature).

Best For:

• Investors who want consistency, low risk, and flexibility.

• Ideal for retirement income or cash flow planning.

Bond Barbell

What It Is:

A bond barbell strategy splits your investment between short-term bonds and long-term bonds, avoiding the middle maturities. Imagine your barbell at the gym. 

How It Works:

• You put, say, 50% in short-term bonds (1-2 years) and 50% in long-term bonds (10 years).

• The short-term bonds give liquidity and are reinvested more often.

• The long-term bonds offer higher yields.

Key Advantages:

• Takes advantage of interest rate swings.

• Long-term bonds lock in higher yields, while short-term bonds allow flexibility.

• Can outperform ladders in stable or falling-rate environments. 

Risks:

• More exposure to long-term interest rate risk.

• Less steady cash flow than a ladder.

Best For:

• Investors who are willing to take on a bit more duration risk for potentially higher returns.

• Those with a more tactical or active approach to bonds.

Which One for You?

Go with a ladder, If you’re looking for:

• Steady income

• Low risk

• And a more “set-and-forget” structure

Consider the barbell, If you want:

• Higher potential returns

• Are comfortable with some risk

• And want to actively manage interest rates

In a rising-rate environment (e.g., due to inflation or commodity shocks), a barbell strategy gives you more flexibility and control. The short end acts as a safety valve, while the long end provides yield, without locking your entire portfolio into rate-sensitive assets.

Let's consider a real case as an example. 

Objective: Balance income and flexibility in a rising interest rate environment

Strategy:

·       50% allocated to short-term government bonds (1–2 years)

·       50% allocated to long-term government bonds (10+ years)

Short-Term Side (Liquidity & Reinvestment Opportunity)

Purpose: These bonds will mature soon and allow you to reinvest at higher yields ifrates rise further. 

Long-Term Side (Yield Boost & Duration)

Purpose: These provide higher yields and lock in income for the long term. The Romanian 2035 bond offers an especially attractive spread for risk-tolerant investors 

Strategic Benefits

• Short-term bonds mature soon and can be rolled over at higher yields.

• Long-term bonds secure higher income now, especially Romanian ones, which offer a yield premium for moderate risk.

• Blending Eurozone and non-Eurozone bonds (such as those from Romania) adds yield without straying too far on the risk spectrum. 

Considerations

• Currency risk: If you invest in Romanian bonds, avoid leu (RON)-denominated bonds, and be aware of FX risk. Most are available in EUR.

• Credit risk: Romanian debt offers higher yields but comes with emerging market credit exposure.

• Rate sensitivity: Long-term bonds still lose value if rates spike, but your short-term holdings cushion this.

Disclaimer

The content shared in this article is for informational and educational purposes only and does not constitute financial advice. Every investor has different goals, risk tolerance, and timelines, and no single portfolio is suitable for all. If you’re ready to move beyond financial guesswork and start building a personalised investment strategy, we invite you to explore our courses at: