Bond Strategies — Optimizing Your Fixed-Income Portfolio

Why This Matters

Government bonds form the largest and most liquid segment of Angola’s capital markets. A portfolio of Kz 10,000,000 in treasury bonds is not just “buy the highest yield” — how you structure the maturities, manage reinvestment, and position for interest rate changes can add 1-3 percentage points to your annual return. In a market yielding 20%, that is the difference between good and exceptional results.

Angola’s Yield Curve

The yield curve plots bond yields against maturity. Angola’s current curve:

This is a “normal” upward-sloping curve — longer maturities pay higher yields to compensate for greater duration risk. The slope from 91-day to 10-year is 3.5 percentage points.

Strategy 1: The Bond Ladder

A bond ladder staggers maturities so bonds come due at regular intervals. When each bond matures, reinvest the proceeds at the long end.

Example: Kz 10,000,000 across 5 rungs:

• Kz 2,000,000 in 1-year OT (17.5%)
• Kz 2,000,000 in 2-year OT (20.0%)
• Kz 2,000,000 in 3-year OT (20.5%)
• Kz 2,000,000 in 5-year OT (21.0%)
• Kz 2,000,000 in 7-year OT (21.5%)

Weighted average yield: 20.5%

Benefits: Regular liquidity events (money available each year if needed), automatic exposure across the curve, reduced reinvestment risk (you are not rolling all bonds at once into potentially lower rates).

When the 1-year bond matures, buy a new 7-year bond. Over time, the portfolio self-adjusts to maintain ladder structure.

Strategy 2: The Barbell

Concentrate holdings at the short end and long end, with little in the middle. This combines liquidity (short bonds) with higher yields (long bonds).

Example: Kz 10,000,000 barbell:

• Kz 5,000,000 in 91-day treasury bills (18.5%) — rollover quarterly
• Kz 5,000,000 in 10-year OT (22.0%)

Weighted average yield: 20.25%

Benefits: Maximum liquidity on half the portfolio (91-day bills easily rolled), highest yield on the other half. If rates rise, you reinvest the short end at higher rates. If rates fall, the long bonds appreciate in price (inverse relationship).

Risk: If the yield curve flattens (short rates rise to meet long rates), the barbell loses its advantage over a ladder.

Strategy 3: Riding the Yield Curve

Buy bonds with longer maturities than you intend to hold, then sell before maturity to capture price appreciation as they “roll down” the curve.

Example: Buy a 5-year bond at 21%. After 2 years, it is now a 3-year bond. If the yield curve has not changed, 3-year bonds yield 20.5%. Your bond with its higher 21% coupon is now worth more than face value (premium). Sell it for a capital gain plus 2 years of coupon income.

Return calculation:

• 2 years of coupons: 21% × 2 = 42% cumulative
• Capital gain from roll-down: approximately 1-2%
• Total 2-year return: approximately 43-44%, or ~21.5% annualized
• vs. holding a 2-year bond at 20%: only 40% over 2 years

The extra 1.5% annual return from riding the curve may seem small, but on a Kz 10,000,000 position, it is Kz 150,000 per year in additional income.

Strategy 4: Kwanza/USD Split

Allocate your bond portfolio between Kwanza and USD-indexed instruments based on your currency outlook:

If you expect Kwanza stability or strengthening: Overweight Kwanza OTs (21% vs. 8% USD-indexed).

If you expect Kwanza depreciation: Overweight USD-indexed OTs. An 8% USD yield plus 10% Kwanza depreciation = approximately 18% effective Kwanza return, and you preserve dollar purchasing power.

Balanced approach: 60/40 or 70/30 Kwanza/USD split. This hedges the currency bet while capturing most of the Kwanza yield premium.

Worked Example: Bond Portfolio Optimization

Fernanda has Kz 15,000,000 for her bond portfolio. She expects BNA to begin cutting rates in 12-18 months as inflation trends downward.

Strategy: Extend duration now to lock in high yields before rates fall. Overweight 5-7 year bonds. Maintain 30% USD-indexed as currency hedge.

Weighted after-tax yield: 16.7% blended (lower due to USD-indexed drag)

If BNA cuts rates by 3% in 18 months: Fernanda’s longer-duration bonds appreciate significantly. A 5-year bond at 21% is now worth more when new 5-year bonds offer only 18%. Estimated price gain: 6-9% on the long bonds. If she sells the 5-year bonds (now 3.5-year bonds) at the appreciated price, her total return including coupons exceeds 30% over the 18-month period.

Key Takeaways

• Bond strategy is about more than yield — maturity structure, currency mix, and rate positioning matter
• Ladder provides balanced exposure and regular liquidity
• Barbell maximizes optionality with liquidity at the short end and yield at the long end
• Riding the curve captures extra return from the yield curve slope
• Currency split manages depreciation risk without sacrificing all Kwanza yield
• Longer-duration bonds benefit more when rates fall (lock in high rates before expected cuts)
• IAC tax advantage for bonds > 3 years (5% vs. 10%) favors longer maturities

Common Mistakes

Always buying the shortest maturity — 91-day bills are liquid but you miss the higher yields at the long end and must reinvest at whatever rate is available every 3 months.

Ignoring duration risk — Long bonds can lose 5-10% of market value if rates rise sharply. Only hold long bonds if you can hold to maturity or have a strong conviction on rate direction.

Not reinvesting coupons — Coupon income should go back into bonds to maintain compounding. Spending coupons reduces your effective return to simple interest.

What’s Next

While bonds provide income, dividends from stocks offer growing income — companies can increase dividends as profits rise. The next lesson covers dividend investing strategies for BODIVA.

Next Lesson: Dividend Investing — Growing Your Income Stream

Analyze any bond with the Bond Yield Calculator. Review current yields on the Bond Dashboard.