Fixed-income barbell strategies: Balancing flexibility and yield

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It may look daunting, but it gets easier after a few reps.

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In fixed-income investing, maturity—the date at which you receive the final interest payment and the return of your principal—may be a few days away, several decades from now, or anywhere in between. Many investors choose to “ladder” their fixed-income portfolios, spreading maturities across the yield curve to generate steady coupon income and diversification.

Another approach is a barbell bond strategy. Imagine the yield curve as a weightlifting bar, with shorter maturities on the left side and longer maturities on the right side, but skipping the middle. A barbell strategy in fixed income gives you interest rate flexibility and access to higher yields, but it’s also more complex than it looks.

In a typical barbell strategy, you buy short-term bonds and notes—usually maturing in less than three years—and long-dated bonds that mature in a decade or more. You generally avoid bonds that mature in the middle of the curve, roughly three to nine years. And depending on your rate outlook, you can split your money 50-50, or tilt it toward one end of the barbell.

This differs from a classic bond ladder, where you’d own several maturities that expire at varying lengths, such as one to five years. When the one-year bond matures, you’d use the proceeds to buy a five-year bond to create new ladder rungs.

Unlike the consistent maturities of a bond ladder, a barbell portfolio is a strategy of contrasts. The shorter-dated bonds mature quickly and let you take advantage of any potential changes in prevailing interest rates. They also provide liquidity and stability, because you’ll have cash-like investments close at hand. On the other side of the barbell, your long-dated bonds will typically pay higher yields to compensate for the duration risk you are taking on for lending your money over the long term. If interest rates decline, there’s also the potential for price appreciation, because bond prices move inversely to yields.

If you want the income that comes with longer-dated bonds but don’t want to load your portfolio with 20- or 30-year maturities, a barbell strategy gives you choices. Short-term bonds provide flexibility and liquidity, while longer-dated bonds help boost yield. That balance can make it easier to manage interest rate uncertainty without giving up income.

By balancing longer- and shorter-dated bonds, you reduce risk while still benefiting from higher yields. It also helps you manage interest rate uncertainty when bond prices are volatile. If yields rise across the curve, maturing short-term bonds can be reinvested in higher-yielding new issues. If yields fall, you’ve locked in those higher yields and may benefit from rising bond prices.

Intermediate bonds—those with maturities of roughly three to nine years, sometimes called the “belly” of the yield curve—can leave you in yield limbo. They typically offer lower yield than longer-term bonds, but don’t have the flexibility to reinvest as you would with short-term bonds. 

A barbell strategy can be more attractive when the yield curve is flat or inverted, with short-term rates higher than long-term rates, or when the market expects the Federal Reserve to cut interest rates.

You can create your own barbell strategies using a variety of fixed-income vehicles, including U.S. Treasurys, certificates of deposit (CDs), or exchange-traded funds (ETFs). You can split your money equally between both barbell ends, or tilt toward one end or the other, depending on your market outlook.

If you want to begin with U.S. Treasury bills, notes, or bonds, you can set up an account at Treasury Direct to buy these straight from the government, or through your brokerage account. You could start by purchasing one-, three-, and/or six-month securities on the short end and 10-, 20-, and/or 30-year Treasury bonds on the long end.

CDs offer another way to build the short-term maturity side of your barbell and get backing from the Federal Deposit Insurance Corporation (FDIC) as well. Many banks offer CDs with as little as one month to maturity. (You may also find high-yield savings accounts with rates that rival—or even surpass—those of short-term CDs.) Some banks or financial institutions have CDs that mature in 10 years.

ETFs are another way to build a barbell strategy. There are ETFs that track U.S. Treasury indexes on the short end, such as one- to three-year Treasury ETFs. There are also longer-dated ETFs, such as those tracking U.S. Treasurys with maturities more than 20 years in the future. Unlike individual bonds, bond ETFs don’t have a defined maturity date. Instead, they maintain a target maturity or duration by regularly rolling their holdings, which means you can’t hold them to maturity. For that reason, some investors pair short-term Treasury ETFs with an individual long-dated Treasury bond.

The benefits of a barbell strategy include diversification, flexibility, liquidity, and access to higher yields while helping to manage interest rate risk. But as with any investment approach, there are trade-offs.

Barbell strategies require a hands-on approach. Unlike with bond ladders, where you’re reinvesting distributions on a schedule, you need to stay on top of barbell strategies. You’ll need to regularly decide how to reinvest the short-term payouts and monitor changes in the yield curve. You may be vulnerable to reinvestment risk if near-term yields have fallen, since you haven’t locked up those yields for the long term.

The long end of the barbell carries its own risks. Longer-dated bonds are more sensitive to interest rate changes, and rising rates can lead to sharp price declines. For example, a bond with a 10-year duration would lose about 10% of its value if interest rates rise by one percentage point.

Barbell strategies are more complex than traditional bond approaches, requiring discipline and close attention to market conditions and bond maturities. If you value flexibility and want a way to navigate interest rate uncertainty, the trade-off may be worth it, assuming it fits into your broader financial plan and risk tolerance. As with any strength training routine, balance and discipline matter more than brute force.