Building a T-Bill Ladder for Regular Income and Higher Yields

Meow Advisory, LLC

Meow Advisory, LLC

With interest rates on the rise, many fixed income investors are looking for ways to generate extra yield without taking on too much additional risk. One strategy that can help is utilizing a Treasury bill ladder.

T-bills are short-term debt obligations issued by the U.S. Treasury with maturities of one year or less. They are considered amongst the safest investments available, since they are backed by the full faith and credit of the U.S. government. T-bills do not pay interest - instead they are sold at a discount from their face value. For example, you might pay $97 for a T-bill with a face value of $100. When the bill matures, barring a government default, you would receive the full $100 face value, earning $3 in interest.

A T-bill ladder simply refers to owning a series of T-bills with staggered maturity dates. As each bill matures, you take the principal and reinvest it into a new T-bill with a maturity date further out. This provides you with access to cash on a regular basis, while allowing you to capitalize on rising interest rates.

In this comprehensive guide, we will explore T-bill ladders in depth - from the benefits they provide to how to construct and manage your own ladder.

What are the Benefits of a T-Bill Ladder?

There are several advantages to utilizing a T-bill ladder as part of your fixed income portfolio:

Access to Regular Cash Flow - With T-bills maturing at regular intervals, you have access to principal on a predictable schedule. This cash can then be reinvested or used to supplement your regular income.

Mitigate Reinvestment Risk - When holding individual bonds, you face reinvestment risk when the bond matures and you must replace it with new bonds at the prevailing lower rates. With a ladder, you are always able to reinvest maturing principal at current yields.

Capitalize on Rising Rates - In a rising rate environment, a ladder allows you to consistently roll into higher yielding T-bills. Your overall portfolio yield will increase with each new investment.

Lower Duration Risk - Being locked into longer-term individual bonds can expose you to duration risk, where bond prices fall when rates rise. A ladder provides more flexibility to adjust your portfolio.

Diversification - Laddering bonds with different maturities helps diversify your portfolio and reduces risks compared to holding one bond.

As you can see, laddering T-bills has major advantages for conservative investors looking for safe cash flow. Next, let's discuss how to construct your own T-bill ladder.

How to Construct a T-Bill Ladder

Building a T-bill ladder is straightforward once you determine your investment amount and maturity spacing. Follow these steps:

Decide amount to invest

Determine how much you want to allocate to your T-bill ladder. Generally ladders work best with at least $100,000 to $250,000. This provides enough principal so you have cash coming due frequently.

Choose maturity spacing

Typical spacing is monthly, quarterly or semi-annually. Monthly provides the most frequent cash flows but requires more transactions. Quarterly or semi-annual spacing is more common.

Purchase T-bills

Buy your first T-bill with a maturity matching your spacing. For quarterly spacing, invest in a 3-month T-bill first. Then buy a 6-month, 9-month, and 12-month T-bill. Your investment amount is spread evenly across each bill.

Reinvest maturing T-bills

As each T-bill matures, take the principal and reinvest it into a new T-bill with a maturity matching your spacing. After the first 12-month bill matures, buy another 12-month to keep the ladder going.

Repeat the process

Continue reinvesting your maturing principal into new T-bills further out on the yield curve to maintain your ladder.

Tip: Use Meow to easily purchase T-Bills in your company's name with an intuitive UI.

Let's look at an example to see how a T-bill ladder generates predictable cash flows...

T-Bill Ladder Example

Say you start with $100,000 to invest and choose quarterly spacing. You build your ladder by purchasing:

3-month T-bill: $25,000

6-month T-bill: $25,000

9-month T-bill: $25,000

12-month T-bill: $25,000

In the first 3 months, your 3-month T-bill matures. You take the $25,000 principal and buy a new 12-month bill. In the next 3 months, your 6-month bill matures; you reinvest in another 12-month. This continues every 3 months - you have $25,000 maturing which you roll into a newly issued 12-month T-bill.

This example has $25,000 in principal redeemable every quarter. The regular cash flow is ideal for conservative investors who need income. As an added benefit, yields increase with each new investment as interest rates rise.

Managing Your T-Bill Ladder

Once your ladder is set up, some ongoing management is required:

Handle maturing principal - Do you want to take the cash or reinvest? Reinvesting maintains your ladder.

Adjust investments - You may want to stop reinvesting principal if rates decline substantially.

Exit ladder positions - If rates rise sharply, you can sell T-bills rather than waiting for maturity.

Analyze yield trends - Make sure increasing yields justify continuation of the ladder.

Review other options - Consider rotating into bonds if credit spreads tighten.

Measure impact on portfolio - Check that the ladder is enhancing overall return and income.

Proper management is critical to maximize the benefits of your T-bill ladder. Consulting a financial advisor can help if you need assistance.

Who is a T-Bill Ladder Suitable For?

When utilized correctly, T-bill ladders can benefit a variety of conservative investors:

Retirees - The regular cash flows can provide income for living expenses.

Income investors - The predictable interest payments offer steady portfolio income.

Near-term goal funding - Maturing principal can fund large purchases several years out.

Low-risk tolerance - Allows slightly higher yield with minimal added risk over cash.

Portfolio diversification - Laddering provides fixed income diversification from credit risk.

Of course, T-bills and bond ladders won't be the optimal strategy for everyone. Growth-oriented investors may prefer equities or high-yield bonds. Those with immediate cash needs may be better off with savings accounts or CDs.

As always, consider consulting a financial advisor to determine if T-bill ladders match your investment profile and goals.

Key Takeaways on T-Bill Ladders

Constructing a Treasury bill ladder offers distinct benefits to fixed income investors:

Provides regular access to principal every 3, 6 or 12 months

Rolls maturing T-bills into new issues at higher rates

Generates predictable cash flow ideal for income needs

Limits risks compared to individual bonds or notes

By staggering T-bill maturities, you can take advantage of rising yields and mitigate risks associated with locking into longer-term bonds. Limiting duration exposure also provides flexibility to adjust your fixed income portfolio.

While not completely risk-free, T-bill ladders offer a conservative way to generate income. With a properly built and managed ladder, investors get peace of mind knowing they have secure cash coming due on a routine basis. That peace of mind is invaluable given the ups and downs of the economy and markets.


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