What is a T-Bill Ladder?
A T-Bill ladder is a strategy that involves sequentially purchasing investment-grade T-Bills that mature at different times in the near future. This latter point is where T-Bill ladders differ from the bond ladder strategy, which focuses on purchasing bank certificates of deposits (CDs) or bonds with longer maturities.
The goal is to provide income while also reducing risks from interest rate hikes or declines. You can create a near-perpetual revenue stream if you continue to reinvest the cash from each maturing bond.
The three main pieces to building one are rungs, spacing, and investments.
Rungs of the Ladder
Deciding how much you plan to invest in a bond ladder will determine how many rungs it will have. This also decides how far in the future the ladder can be and how often you get paid.
Rung spacing is the time between the maturities of each T-Bill. It is ideal to try to keep the time between maturities near equal.
The T-Bills you ultimately decide to invest in.
Advantages of T-Bill Ladders
In any given interest rate environment, the T-Bill Ladder strategy offers several advantages, much like the bond ladder tool:
With staggered maturity dates, a T-Bill ladder provides liquidity at regular intervals. This liquidity can assist in managing cash flow and meeting any short-term spending needs.
Implementing a T-Bill ladder can result in a diversified portfolio of bonds. Diversification is especially crucial in the bond market, as it can help mitigate interest rate risk and credit risk.
Minimizing Interest Rate Risk
By investing in T-Bills with different maturity dates, you can reduce your exposure to interest rate fluctuations (volatility) and reinvestment risk.
Potential Risks of T-Bill Ladders
Even though T-Bills ladders are considered one of the safest investment strategies, they carry some level of risk:
If you elect to reinvest capital when the assets mature, you can face reinvestment risk. For example, if original investments happened during a higher rate period, when you reinvest, you may only be able to reinvest at new lower rates.
Credit risk might be minimized as T-Bills are backed by the U.S. Treasury. However, it's worth remembering that bond prices can fluctuate based on various market conditions.
Loss of Principal
There may be a slight risk of principal loss if you must sell a T-Bill before its maturity date due to a financial need.
How to Build a T-Bill Ladder
Building a T-Bill ladder involves investing in a portfolio of bonds with varying maturity dates and interest rates.
Here are the steps to create a ladder:
Start with an investment policy
Create clear guidelines and first principles that are easily understandable by your team, investors, and other key stakeholders.
An investment policy serves two main functions: Your internal team sees how cash will be managed so everyone moves in the same direction, and your investors will understand you are managing your idle cash prudently and conservatively.
Establish Your T-Bill Ladder Investment Objectives
Determine your risk tolerance, the income level desired from your investment, and consider the duration of your bond ladder to align with your investment timeframe.
Choose Your T-Bills
Choose T-Bills with different maturity dates according to your cash flow needs. T-Bills are generally issued with maturity periods of 4, 8, 13, 26, and 52 weeks.
Buy Your T-Bills
You can purchase T-Bills in a competitive or non-competitive bidding process from the U.S. Treasury or the secondary market. You can use services like TreasuryDirect (treasurydirect.gov) or brokerage firms for this.
Reinvest Maturing Bonds
As each T-Bill reaches its maturity date, reinvest the principal into a new T-Bill with a farthest-out maturity date. This helps to maintain the ladder structure.
Monitor market trends and reinvest assets per your investment policy
The treasury market constantly evolves as new economic data points provide the Federal Reserve (“The Fed”) with indicators of how their inflation-control efforts are progressing (i.e. should interest rates rise or fall?).
Your asset investment strategy must reflect the realities of today’s market, not yesterday’s.
How Much Time is Required to Manage T-Bill Ladders?
T-Bill ladders can be a strong tool in your cash management strategy. However, effective cash management requires more than a set-it-and-forget-it approach, and T-Bill ladders are no different.
Purchasing your T-Bills is only part of the equation. Some time commitment is required to manage your holdings, purchase at ideal times, and compare how your returns are tracking against your overall investment goals.
You may also find that your business needs to adjust its investment strategy to account for business-related or market-related changes.
With Rho Prime Treasury, we handle this heavy lifting for you.
Note: Rho does not guarantee treasury yields. Be mindful of providers that promise or guarantee higher yields.
How Do I Purchase T-Bills?
U.S. T-Bills are largely considered a low-risk investment thanks to the government-backed guarantee. There are a few options to purchase Treasury Bills:
T-Bills sell via auction on a set schedule. You can purchase bills with a non-competitive or competitive bid directly from the U.S. Treasury at each auction.
Most investors prefer to buy T-Bills with a non-competitive bid. The benefit of a non-competitive bid is that you have a guarantee to buy T-Bills at the final auction price.
With a competitive bid, you state the minimum rate of return your business is willing to earn for the new issue T-Bill. You get bills if the auction closes at or above that minimum rate. The downside to a competitive bid is running the risk of buying nothing. You wanted such a high return rate because buyers with lower expectations might have bought before you.
The size of the T-Bill market is in the trillions! And it grows each year as the issuer, the U.S. government, distributes new bonds to run the country. This means there is an active and liquid secondary market for previously issued T-Bills. Your finance team can buy and sell T-Bills through your company’s bank or brokerage firm.
Note: T-Bill transaction liquidity is very attractive; when you sell them, the money will be available in your organization’s brokerage account the next day.
If you want to geek out on U.S. Treasury Securities statistics – check out this SIFMA page.
Wrap-Up: Simplify Cash Management with Rho
There is no perfect investment. However, investors and financial advisors focused on maximum safety over returns have an option in U.S. T-Bill ladders.
T-Bill ladders are just one of several powerful financial tools that can help you manage cash effectively. T-Bill ladders can be integral to your financial strategy by providing predictable income while minimizing risks.
At Rho, we provide integrated technology and investment options to help you build your investment strategy with custom portfolios and bond ladders.
Reach out to one of our specialists to learn what our bespoke treasury management can do for your business and open a Rho Prime Treasury account today.
Interested in learning about money market funds, the yield curve, ETFs, and other important financial topics? Visit the Rho blog today.
In case helpful, here is a quick refresher on T-Bills. It’s important that you understand these concepts before proceeding to execute a T-Bill ladder strategy.
What is a T-Bill?
A Treasury bill (or T-Bill) is a fixed-income debt security issued by the U.S. Department of the Treasury to fund government operations.
When you buy a T-Bill, you loan money to the U.S. government for a period of time (one year or less) – like an IOU. In return, you receive the full par value at maturity.
Here is an example:
1. A $1,000 face value bill sells at auction for a bond price of $950 and a six-month maturity.
2. Assuming you hold the T-Bill for six months, you will get $50 per bill.
3. $1,000 face value - $950 buy price = $50 earned
Since the U.S. government is issuing and backing the T-Bill, it carries a “risk-free” status; as long as the U.S. government can pay its debts, you will receive the face value of the T-Bill at maturity (an “interest payment” of sorts).
While individual risk tolerance levels vary, this “risk-free” status is so important that even banks and other institutional investors place their short-term cash in T-Bills.
How are Treasury Bills used?
Let’s examine how your business can leverage T-Bills with a corporate treasury management investment portfolio.
Need: Your company has $1,000,000 total to invest, with a focus on safety, but some return is also important.
Solution: Put $250,000 max in an FDIC-insured account and $750,000 in a T-Bill ladder.
Remember, bank accounts only have $250k of FDIC protection. Any dollar above $250k in a bank account is at risk. That means your organization would need four bank accounts at four different financial institutions to have FDIC protection on a $1,000,000 cash balance.
T-Bills fix the FDIC limit problem because of the U.S. government guarantee. Your business could keep $250k in a bank account for expenses and FDIC protection and then put the remaining $750k into a T-Bill ladder, being mindful of maturity dates to prevent cash flow issues.
The $750k for the Treasury bill ladder is spread over different maturities up to 52 weeks. Each time a T-Bill matures, your entity would get paid the par or face value and then rebuy new T-Bills with a maturity date in the future.
If your corporate expenses spiked above the $250k in the bank account, you could sell a T-Bill in the liquid market, and cash would be in your account in one day.
While this example is basic, it highlights the safety (U.S. government backing), liquidity (secondary market), and defined return (discount to face) T-Bills give investors.
Do T-Bills Pay Interest?
Unlike traditional bonds, T-Bills do not make periodic interest payments, also known as coupon payments. Instead, they are issued at a discount to their face value. This is why T-Bills are often referred to as zero-coupon bonds.
Can T-Bills Default?
Given the full backing of the U.S. government, the risk of default on T-Bills is elementary. As long as the U.S. government can meet its financial obligations, investors can be confident in receiving the face value of the T-Bill at its maturity.
Are T-Bills FDIC-Insured?
No, Treasury Bills (T-Bills) are not insured by the Federal Deposit Insurance Corporation (FDIC). However, they are backed by the full faith and credit of the U.S. Government, making them considered one of the safest investments.
FDIC insurance applies to deposit accounts at FDIC-insured banks but not to investments such as stocks, bonds, mutual funds, life insurance policies, annuities, or fixed-income securities, including T-Bills.
What Are Bonds?
Bonds are debt securities that provide regular income to those who purchase them (referred to as bondholders). Bonds can come in several varieties based on the bond issuer distributing them, maturity dates, and other factors.
- Municipal bonds: Issued by state or local governments. The interest you get from muni bonds is generally tax-exempt at the federal level and possibly at state and local levels.
- Corporate bonds: Issued by companies.
- iBonds: iBonds are inflation-indexed savings bonds offered by the U.S. Treasury, a great tool for protecting your investment against longer-term inflation.
Let's dig a bit deeper. For illustrative purposes, when you invest in individual bonds, you essentially act as a lender to the issuer. In exchange, you receive scheduled payments over a specified period, and the bond’s face value returns when it reaches maturity.
Bonds can range in credit quality; some are classified as investment-grade and others are classified as high-yield (also referred to as "junk bonds"), which offer higher yields to compensate for the higher risk associated with bonds of lower credit quality.
A common practice mentioned previously in this post is to diversify your portfolio. Investors can do so by investing in various different bonds that vary in terms of issuer, maturity date, yield, and credit rating.
Before investing in any bonds, it’s critical that you spend some time reviewing the prospectus, which gives detailed information about the security, including its credit quality, maturity date, yield, and the reputability of the issuer.
Finally, the Securities Investor Protection Corporation (SIPC) protects against the loss of cash and securities – such as stocks and bonds – in case the broker fails. However, it does not protect against market loss.
For example, Rho Prime Treasury assets are SIPC insured up to $500,000, which includes a $250,000 limit for cash. Read more about Prime Treasury in our FAQ here.