Many bond portfolio managers argue that bond laddering tends to outperform other bond investment strategies because it reduces both market price risk and reinvestment risk for a bond portfolio in the presence of interest rate uncertainty. Despite the popularity of bond ladders as a
strategy for managing investments in fixed-income securities, there is surprising little reference
to this subject in the economics and finance literature. In this paper we analyze complex bond portfolios within the framework of a dynamic general equilibrium asset-pricing model. Equilibrium bond portfolios are nonsensical, implying a trading volume that vastly exceeds observed
trading volume on ¯nancial markets. Such portfolios would also be very costly and thus suboptimal in the presence of even very small transaction costs. Instead portfolios combining bond ladders with a market portfolio of equity assets are nearly optimal investment strategies, which
in addition would minimize transaction costs. This paper, therefore, provides a rationale for bond ladders as a popular bond investment strategy.