It may seem off base to consider rising interest rates today, yet we can see that the secular bull in bonds may have ended in July 2012 when the 10 Year Treasury Rate touched 1.53% (Yesterday it closed at 1.83%). Investing via a combination of 5 and 10-year ladders may be the best protective approach for a gradual secular rise in rates.

10 Year Treasury Rate

It’s easy to understand why bond investing during a rapidly rising rate environment can be scary when you look at the following table for the 10 Year Treasury.

Bond Ladders for Protection from Rising Rates

Generally, shorter-term ladders forgo the benefits of higher long-term rates, but adjust more quickly to rising rates. Longer term ladders gain the benefit of higher long-term rates, but adjust more slowly to rising rates. 10-year ladders may be the sweet spot for a gradual rise or fall in rates.

This is evident in the below Crestmont Research tables and chart.

Overall, combinations may be the optimal protective secular approach:

A) 5 and 10-year ladders for a secular gradual rise in rates

B) 20 and 10-year ladders for a secular gradual fall in rates

Today investors now have available corporate bond ladder ETFs, such as Guggenheim Investment’s BulletShares and iShare’s iBonds, which provide a more convenient way to invest in ladder combinations. The primary caveat is that these ETFs hold small percentages of both redeemable and callable bonds which means that in the event of a bond redemption or call, proceeds may sit idle in shorter maturity instruments until the time the ETF is liquidated.

For more information, read Watch Your Step When Using Bond Ladder ETFs 

Here is a list of them.