Fold Up Laddered Bond Strategy

This column was originally published on RealMoney. It's being republished as a bonus for TheStreet.com readers.

It's time for investors to disassemble those laddered fixed-income portfolios.

For the past 20 years or so, most fixed-income strategists, including myself, have advised individual investors to create a laddered portfolio of fixed-income securities in their retirement accounts. With a laddered portfolio, the investor buys securities at different maturities (the ladder) at future dates, when the return of principal is most likely to meet the needs of the investor during the retirement years.

This was a favored strategy of mine when I helped advise individual investors as a U.S. Treasury strategist at Smith Barney in the first half of the 1990s. Given the decline in yields since then, I say it's time to book the long-term profits by disassembling the ladder.

A longer-term trend toward higher yields lends support to my strategy recommendation.

The Five-Year's Cue

When I look at the direction of U.S. Treasury yields, I focus on the five-year note. The weekly chart below clearly shows that the yield on the five-year bottomed in June 2003 as the Federal Open Market Committee pushed the federal funds rate to 1.00%.

A Clear Low The five-year's yield hit bottom in June 2003, with the federal funds rate at 1.00%

Source: GMC Reports

The five-year yield now is rising above the 200-week simple moving average at 3.520%. The decline in yields since March 23 provides an opportunity to sell at lower yields, while the FOMC continues to raise short-term rates at its stated "measured pace." The FOMC has raised the federal funds rate by 25 basis points at each of eight meetings, beginning June 30, 2004. This has taken the funds rate to 3.00% from 1.00%. The next (two-day) FOMC meeting is June 29 and 30; a rate hike to 3.25% is likely to be announced at 2:15 p.m. EDT on June 30.

There is further evidence that Treasury yields are on the rise in the daily chart for the five-year yield. This chart shows that the yield on the five-year rose above its 200-day moving average on Nov. 5, 2004. Tests of this rising trend for yields failed in December 2004 and February 2005. At this time, the 200-day moving average provides strong resistance to the yield falling below 3.672%.

Resistance at 3.672% The five-year's yield is unlikely to fall below this level

Source: GMC Reports

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