What is a Treasury Bill Ladder?

Treasury Bill Ladders are short-term debt securities issued by the US government, with terms ranging from 4 to 52 weeks, and are sold at a discount from their face value.

Looking for a secure and flexible investment option? Consider a Treasury bill ladder, a strategy built on holding multiple Treasury bills with different maturity dates. Investing in Treasury bills allows you to enjoy the advantages of safety, liquidity and tax benefits while minimizing the risk of interest rate fluctuations and uncertainties in reinvestment. Discover how a Treasury bill ladder works and the steps you can take to create your ladder.

Understanding Treasury Bills

Treasury bills (T-bills), short-term debt securities issued by the U.S. government, are widely regarded as one of the world's safest investments. They offer maturities ranging from 4 to 52 weeks and are sold at a discount to their face value. When a T-bill matures, you'll receive its full value despite buying it at a discount. Your earned interest is the difference between the face value and the purchase price. 

T-bills are appealing investments for several reasons: they're highly liquid, exempt from state and local income taxes, have lower federal income tax rates and have low transaction costs and minimal investment requirements. They're also helpful for portfolio diversification, as they often have had a low correlation with other asset classes – they can perform well when other investments are doing poorly.

How a Treasury Bill Ladder Works

A Treasury bill ladder is a popular investing strategy that allows you to create a steady stream of income and principal payments. The idea is to purchase and hold multiple securities with different maturity dates, which creates a ladder-like structure. Each rung in the ladder is formed by buying T-bills with different maturities. As each bill matures, you receive the face value and interest income, which you can then reinvest in a T-bill with the longest maturity in your ladder to maintain its length and structure. Repeat this process to reach your investment goal or decide to liquidate your ladder.

Building a Treasury Bill Ladder

To build a Treasury bill ladder, you need to consider factors, such as:

• The amount of money you want to invest
• The length of time you want to invest
• The number of rungs you want in your ladder
• The frequency of principal and interest payments you want to receive
• The interest rate environment and your expectations for future changes

Based on these, you can decide how many T-bills to buy, what maturities to choose and how much to allocate to each rung. For example, if you have $10,000 to invest for one year and want five rungs in your ladder, you could buy:

• $2,000 worth of 4-week T-bills
• $2,000 worth of 8-week T-bills
• $2,000 worth of 13-week T-bills
• $2,000 worth of 26-week T-bills
• $2,000 worth of 52-week T-bills

This way, you would have an average maturity of 6 months and receive income and principal payments every 4 weeks.

Benefits of a Treasury Bill Ladder

A Treasury bill ladder offers several benefits for investors who want to preserve their capital and generate income while minimizing risk. 

• Enhanced liquidity and flexibility: With a Treasury bill ladder, you'll have a steady cash stream that can go towards paying bills, building an emergency fund or exploring new investment opportunities. You can customize your ladder to fit your needs and preferences by adding or removing rungs or adjusting maturities.
• Potential for higher returns: You can take advantage of changing interest rates by reinvesting your proceeds at higher rates when they rise or locking in lower rates when they fall.
• Reduced risk through diversification: Treasury bills are low-risk, government-backed securities with little chance of default or value loss. They also tend to negatively correlate with stocks, performing well during stock market declines. Investing in Treasury bills with various maturities makes it possible to balance your risk/return profile and hedge against inflation.
• Tax efficiency: A Treasury bill ladder can help you lower your tax burden by avoiding state and local income taxes and paying lower federal income tax rates on your interest income. You can also defer taxes by holding your T-bills until maturity or selling them at a loss.

Risks and Considerations

Although a Treasury bill ladder is a relatively safe and straightforward investment strategy, it is not without risks. Consider the following:

• Opportunity cost: A Treasury bill ladder may not offer the best returns compared to other investment options, especially in a low-interest rate environment. You may miss out on higher returns from stocks, bonds or other securities with higher risk and reward potential. 
• Inflation risk: Investing in a Treasury bill ladder may not be enough to combat the effects of inflation. Inflation can gradually devalue your money over time, resulting in a negative real return on your investment if interest rates fail to keep up with inflation.
• Reinvestment risk: An effective Treasury bill ladder relies on the availability and attractiveness of T-bills in the market. A shortage of T-bills or meager interest rates makes it impossible to reinvest your returns at favorable rates or maintain the ladder structure you desire.

Comparison with Other Investment Strategies

A Treasury bill ladder is one of many investment strategies you can use to achieve your financial goals. Check out how it stacks up against other options:

• Certificate of deposit (CD) ladder: A CD ladder is similar to a Treasury bill ladder but involves buying and holding multiple CDs with different maturity dates. CDs are deposits that pay a fixed interest rate and are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor per bank. CDs typically offer higher interest rates than T-bills but have higher penalties for early withdrawal and are subject to state and local income taxes.
• Bond ladder: A bond ladder strategy involves purchasing multiple bonds with varying maturity dates and holding them for a specified time. Bonds, debt securities issued by corporations, governments and other entities, offer higher interest rates than Treasury bills. But they also come with higher credit risk and price volatility.
• Stock dividend reinvestment plan (DRIP): DRIP programs allow you to buy and reinvest dividends from stocks without commissions or fees. Stocks represent ownership in a company and pay dividends as a share of profits. They offer higher returns than T-bills but carry higher risk and variability.

The right investment strategy depends on your goals, time frame, risk tolerance, tax situation and expectations regarding inflation and interest rates. For short-term funds, a Treasury bill ladder can provide a secure, high-yield, flexible and liquid option while guarding against inflation. But it's important to weigh the costs, taxes and management expenses that come with building and maintaining such a ladder. 

Real-Life Examples

To illustrate how a Treasury bill ladder works in practice, let’s look at real-life examples of individuals or institutions using Treasury bill ladders.

Example 1: 

Alex, a beginner investor, buys three sets of T-bills worth $1,000 each with varying maturity terms of 4, 8 and 13 weeks.

Her T-bill ladder looks like this:

After four weeks, her first set of T-bills matures and she reinvests the money in a new set of T-bills with a 13-week term and a higher interest rate of 3.80% APY. Her new T-bill ladder looks like this:

She repeats this process every four weeks, rolling over the matured T-bills into new ones with higher rates. After one year, she would have earned more interest income than she would have earned from a savings account or a CD with the same amount.

Example 2: 

Shocke Electric manages cash flow and liquidity across currencies and regions with a treasury management system (TMS). The TMS automates payments and collections and invests excess cash in short-term instruments like T-bills. A T-bill ladder is built with different maturities and currencies to optimize returns and diversify risk. 

Its T-bill ladder looks like this:

Shocke Electric regularly reinvests matured T-bills in higher-yielding or different currency options based on market conditions and cash requirements. The company effectively mitigates currency risks by using the TMS, monitoring exchange rates and utilizing forward contracts or options. A T-bill ladder enables Shocke Electric to manage cash flow, earn higher returns and reduce foreign exchange exposure.

Invest in a Treasury Bill Ladder with Public.com

To buy T-bills, follow these simple steps on Public.com:

1. Move your cash to the Public brokerage app by linking a bank account or making a deposit with your debit card.
2. Create your Treasury Account, which allows you to purchase and manage your Treasury bills from a single account.
3. Purchase U.S. T-bills through your Public account and lock in your rate.

Safety, Income and Flexibility with Treasury Bills

A Treasury bill ladder is an investment strategy that offers a secure, flexible and consistent income stream by spreading T-bill maturities across various dates. This approach is ideal for risk-averse investors who prioritize stability and tax advantages and can be valuable for preserving capital while generating reliable income. However, it may not provide the same level of returns as riskier investments. Also, consider inflation and reinvestment risks before investing in a Treasury bill ladder. 

Frequently Asked Questions