How to Ladder Treasury Bills for Regular Income and Managing Risk

Meow Advisory, LLC

Meow Advisory, LLC

In times of rising interest rates and market volatility, Treasury bills offer a safe haven for fixed income investors. Often called T-bills, these short-term government debt obligations provide income while protecting your principal. One smart strategy is laddering T-bills - buying a series with staggered maturity dates.

A T-bill ladder provides liquidity and flexibility to capitalize on rate changes. You can tap maturing T-bills for income or roll them over for higher yields. With laddering, you avoid the risks of long-term bonds in favor of consistently investing at current rates.

This comprehensive guide will teach you how to ladder T-bills to generate cash flow and manage interest rate exposure.

What are Treasury Bills?

Let's start with an overview of T-bills for those unfamiliar:

Short-term debt obligations issued by the U.S. Treasury in maturities up to 52 weeks

Sold in minimum denominations of $100 at a discount to face value

Backed by full faith and credit of U.S. government

No interest payments; return generated from the difference between purchase price and $100 face value

Issued weekly in 4, 8, 13, 26 and 52 week maturities

Purchase via TreasuryDirect site or broker; secondary market liquidity. Meow makes it easy to purchase U.S. Treasury Bills in your own name, and onboardings are often same-day.

The lack of credit risk and short maturities make T-bills appeal to conservative investors. Now let's examine how laddering them can enhance the benefits.

Benefits of a Laddered T-Bill Portfolio

Constructing a laddered T-bill portfolio has several advantages:

Income - T-bills mature at set intervals, providing periodic income from principal repayment

Liquidity - Access to cash every few weeks or months without selling assets

Reinvestment - Ability to roll over into new T-bills at higher rates in rising rate environment

Flexibility - Adjust maturities any time to capitalize on rate changes

Risk management - Mitigates duration risk relative to long-term bonds

A laddered portfolio also provides diversity across the yield curve compared to owning just one T-bill. The regular cash flows make laddering ideal for conservative investors.

Building Your Treasury Bill Ladder

Constructing the ladder requires determining your portfolio size, maturity spacing, and T-bill purchase plan.

Portfolio Size

Ideally, your laddered portfolio value should be at least $100,000 to $250,000. This ensures meaningful cash flows from periodic maturing T-bills. Investors with smaller amounts can utilize a modified ladder.

Maturity Spacing

Common spacing periods are monthly, quarterly and annually. Closer spacing means more frequent principal repayment but requires more rebalancing transactions. Quarterly or annual spacing is best for most individual investors.

Buying Plan

You want to spread your investment evenly across T-bills matching your maturity spacing. For quarterly spacing, buy 3-month, 6-month, 9-month and 1-year bills simultaneously in equal amounts.

With this initial purchase, you have a maturity every quarter. Simply roll over the maturing T-bills into new 1-year bills to maintain your ladder.

Let’s walk through an example...

Building a $100,000 Laddered T-Bill Portfolio

With quarterly spacing, you will purchase:

3-month T-bill: $25,000

6-month T-bill: $25,000

9-month T-bill: $25,000

1-year T-bill: $25,000

This totals your $100,000 investment spread equally over the maturity spectrum.

Each quarter, as one T-bill matures, you will take the $25,000 principal repayment and purchase a new 1-year bill. This keeps your quarterly ladder in place.

You now have predictable cash flows every quarter. And you can reinvest at higher rates with each new 1-year T-bill!

Managing Your T-Bill Ladder

Once built, a T-bill ladder does require ongoing oversight:

Revisit investment goals - Make sure the ladder aligns with your income needs

Evaluate new options - Compare yields to bonds, CDs, savings accounts

Handle maturities - Take principal as income or reinvest

Monitor rates - Adjust maturities based on rate projections

Liquidate positions - Sell T-bills on secondary market rather than holding to maturity

Be ready to modify the ladder if your circumstances or market conditions change. The flexibility of T-bills allows adjustment at any time.

Extending Your Ladder Further Out the Yield Curve

Some investors construct longer ladders buying 2-year, 3-year, 5-year T-bills etc. The longer maturities provide higher yields, but reduce liquidity and expose you to more interest rate risk.

Most experts suggest limiting T-bill ladders to 1 year or less for individual investors. The short maturities provide safety and flexibility to modify the ladder frequently. Consult a financial advisor when considering longer T-bills.

Combining T-Bill Ladders with Other Investments

For broader diversification, T-bill ladders can be combined with:

High yield savings accounts - To hold cash for liquidity

CD ladders - Bulwark against declining rates

Short-term bond funds - Added income with more risk

Equities - For growth though increased volatility

A future blog post will examine portfolio strategies using T-bill ladders as the foundation.

Building ladders with solely Treasury bills maintains the safety of principal and isolates interest rate risk. Expanding into riskier assets requires thorough analysis of your personal risk tolerances.

Should You Invest in a T-bill Ladder?

Now that you understand the ladder strategy, is it right for your portfolio today? Consider if T-bills can help you:

Preserve wealth and manage risk in volatile markets

Generate conservative income for retirement or expenses

Hedge interest rate exposure from long-term bonds

Get modest extra yield above money markets and savings

Of course, T-bills may not be the optimal choice for everyone. Growth investors may favor equities for higher total return potential. Those with immediate spending needs often choose savings, CDs or ultra short-term bonds.

As always, consider speaking to a financial advisor to ensure laddering T-bills matches your investment plan. The right ladder can provide stability when you need it most.

Bottom Line on Laddering T-Bills

During times of uncertainty, laddering Treasury bills offers a safe harbor. T-bills provide income, liquidity and principal protection. Constructing a bond portfolio with staggered T-bill maturities allows you to:

Systematically invest at current interest rates as each bill matures

Access cash flow at regular intervals without selling assets

Hedge against rising rates and mitigate interest rate exposure

Adjust maturities frequently based on economic trends

By removing credit risk and limiting duration, T-bill ladders provide smart conservative returns. Savvy investors use ladders as part of their plan to generate consistent income. And retirees often rely on these government-backed securities for stable cash flow.

Now that you know the basics of building a T-bill ladder, you can put this strategy to work for your own portfolio. Focus on your investment goals, risk tolerance and liquidity needs. With the right plan, T-bill ladders offer relatively safe returns to weather challenging markets.


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