In a low rate environment for bonds, with many bond issuers highly leveraged and possibly vulnerable in the next recession, hedging bets can be the best strategy, according to officials at the Schwab Center for Financial Research.

With interest rates expected to gradually rise several times over the next six months, they said at a Tuesday press briefing in New York City, laddering strategies often make the most sense for yield hungry bond investors seeking a steady income.

Kathy Jones, Schwab's chief fixed income strategist, said the Fed will increase rates by 25 basis points every quarter for the foreseeable future and that long- and short-term interest rates are converging as the business cycle nears its end.

“If you’re investing for income, you can adopt a strategy for capitalizing on rising rates,” Jones said. She added that laddering “is so simple and so intuitive for our retail clients."

As bonds mature, the investor can use the strategy to reinvest at higher rates. Jones said retail investor with as little as $20,000 can use the strategy, but it is more effective to begin with $100,000. The latter figure allows one “to get enough diversification,” she said.

Another benefit of the strategy, she added, is that it is versatile: It can be used with munis, corporates or treasuries.

The strategy can also be used to set up a monthly income stream for “the retired investor who is used to getting a regular paycheck so you can get a monthly income. And I like this strategy because it is simple. You don’t have to be a rocket scientist to use it,” said Jones.

Another characteristic of this bond market is that long- and short-term rates could converge.

A flat yield curve is probably two to three rate hikes away, said Collin Martin, the Schwab Center’s director of fixed income. And he added that flat doesn’t necessarily mean the bond market is in danger.

A flattening yield curve could be the result of long-term interest rates falling more than short term rates or short-term interest rates rising than faster than long term rates. A flat yield curve is often an indication investors or traders are spooked about the economy.

Jones said she expects the 10-year Treasury to peak at about 3.25 percent.

“We don’t see a lot more upside than that for this cycle,” she said. Jones said Schwab is projecting the inflation rate to be about 2 percent a year.

What could change that?

The unanswered question is what is the potential for a tariff war. More tariffs could push up inflation rates and interest rates, adversely affecting bond prices and the economy, Jones said, speaking on the same day Trump ratcheted up tariffs against Chinese imports.

Although she thought it was unlikely that Chinese investors would suddenly start selling U.S. Treasurys, American tariffs could lead to “a tit for tat problem.” Jones argued that would necessarily mean Chinese tariffs, but result in other kinds of actions that would impact the economy.

“What it they (the Chinese) restrict what products they sent here? What if, Jones added, “they took retaliatory measures against U.S companies based in China?”

All of this could drive up prices in the U.S., hurting bond markets.

What is the effect of huge deficits on rates?

“In the short run, not much,” Jones said, because interest rates are still low. However, noting that debt rates are at historic highs—105 percent public debt to GDP—there could be some long-term problems.

“In the longer term, you have to finance it with debt issue. And you get to a certain level and investors are going to demand higher and higher yields and that could crowd out the private sector,” Jones said.

She said public debt, which isn’t including entitlement spending, needs to be dealt with because the nation, as it is today, “is not going to grow our way out of it.” Jones said part of the problem is that “we are in a slow-growth world.”

Another potential problem for the economy and the bond market, Schwab officials said, is the high rate of corporate leverage.

“Corporate debt is surging,” Martin noted. And that means, if the economy suddenly went into a recession, there is the potential for a corporate bond bubble.