How to Ladder Treasury Bills for Regular Income and Managing Risk
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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