If you invest in Treasury bonds, Understanding how the Bond Ladder Strategy Works can help you set up your bond portfolio.

Here's how Bond Laddering works:
A Bond Ladder is a portfolio of bonds that mature on different dates. It is designed to provide current income while minimizing exposure to interest rate fluctuations. Instead of buying bonds with the same maturity date, you purchase bonds that mature at staggered future dates.

How do you Create a Bond Ladder?
Here are some factors to consider:

1. Rungs.
You take the total amount you plan to invest and divide it with the appropriate number of rungs. For example, if you want to invest Sh 1M in bonds, you divide this into 10 rungs of 100K each.
An additional benefit of having at least six rungs is that you can create a bond ladder structured to generate income every month of the year. This is because interest on bonds is paid out twice in a year.
2. Spacing
The distance between rungs is determined by the span of time between the maturity dates of the different bonds. This can range from months to years but the spacing should be almost equal.
3. Height of the Ladder
The longer the ladder, the higher the average return since bond yields generally increase with time. The longer the maturity date of a bond, the higher the yield and vice versa.

Here's an example of a bond ladder:
Let's say you have sh 1 Million to invest in bonds.
Instead of putting the entire amount in a single bond, you put the money in a series of 6 bonds as follows:
166K in a bond maturing: 1 year from now (2024)
166K in a bond maturing 2 years from now (2025)
166K in a bond maturing 3 years from now ( 2026)
166K in a bond maturing 4 years from now (2027)
166K in a bond maturing 5 years from now (2028)
166K in a bond maturing 6 years from now (2029)
You will have a bond maturing every year, paying you the interest and returning back your initial investment. You can then use that to buy another bond to build the next step in your ladder. That means you will buy another bond in 2024 with a maturity date of 6 years (203. If you buy the bonds on different months, and spread them in a series of 6 bonds, you will get paid interest every month of the year. This is because interest in a single bond is paid out twice a year.
Assuming an average return rate of 12% and a tax of 15% on returns: Each bond will pay you Sh 17K per year. The entire bond series will pay you sh 102K per year. And if you spread the bonds in different months, you will receive sh 8,500 per month in interest.
What are the pros of this strategy:
1. Manage Cash flow.
Since most bonds pay interest twice a year on dates that coincide with their maturity date, Investors can structure predictable monthly bond income based on coupon payments with different maturity months and years.
2. Adds liquidity to your bond portfolio.
Bonds by their nature are illiquid. They can't be cashed out any time without penalties. By buying a series of bonds with different dates of maturity, the investor guarantees that some cash is available within a short time frame.
3. Manage interest rate risk.
By staggering maturity dates, you avoid getting locked into a single interest rate. The bond ladder strategy is mostly used by risk averse investors looking for income over growth.
4. Manage inflation risk.
During times of high inflation, bonds tend to fetch higher returns. Investors demand for higher interest rates from the CBK. Having a bond maturing every year, gives you the opportunity to grab bonds with higher returns.

What are the cons of this strategy?
1. It requires a higher amount of capital to make a bond ladder. This is because you are buying a series of bonds.
2. Varying interest rates. Sometimes you will buy bonds when the returns are low, and this will lower the average returns.
That's it on bond laddering.

The bond ladder strategy is mostly used by risk averse investors looking for income over growth.