How To Build A T-Bill Ladder?

What Are Treasury Bills?

Treasury bills are a type of short-term debt and fixed-income securities issued by the US government. Treasury securities – including bills, notes, and bonds – are backed by the Department of the Treasury and are used by the US government to fund short-term public projects and ongoing expenses. 

When you purchase a treasury bill or any other treasury security, you’re loaning your money to the US government. In return, you get your principal back at maturity plus ‘interests.’

But when is interest on a treasury bill paid out? T-bills don’t pay interest or dividends like traditional investments. Instead, your ‘interests,’ or the yield of the bill, is calculated as the difference between the face value of the bill and how much you purchased it for.

For example, imagine during an auction, a T-bill with a face value of $1,500, a 12-week term, and a 5% discounted price is sold for $1,482.50. You can go ahead and buy it for $1,482.50. At the end of the 12-week term, you’ll get $1,500, earning a total of $17.50 in ‘interests.’

You can purchase T-bills from an online brokerage like Public.com or directly from the TreasuryDirect website. Using a brokerage account has many benefits, including increased liquidity, automatic reinvesting options, and compounding interests. The best platform we’ve found so far is, without a doubt, Public.com.

What’s A Treasury Bill Ladder?

A treasury bill ladder is an investing strategy that revolves around buying treasury bills with staggered maturity terms and holding them until maturity. T-bill terms range from 4 to 52 weeks, so even if interest rates rise shortly after buying one, you can quickly reinvest it when one of your T-bills reaches maturity.

The main objective of this strategy is to generate a consistent source of income. Since you’ll rely on receiving back the principal at maturity, it’s usually a good idea to space out the T-bills evenly so you never have to wait too long for a payout. 

In general, you want to buy a T-bill that will mature very shortly (8-12 weeks), T-bills with medium-term (13-17 weeks), and long-term T-bills (26-52 weeks). That way, one of your bills will mature every couple of weeks. Keep in mind that long-term treasury bills tend to have the highest interest rates, but there’s usually a breaking point. According to Public.com, the largest online broker for purchasing treasury securities, in 2023, the best T-bills in terms of interest rates are 26-week T-bills.

Is Laddering Treasury Bills A Good Idea?

Yes – the main benefit of treasury bill ladders is consistent income. As each T-bill matures, you can add another rung at the end – with the current, ideally higher, interest rate.

Treasury securities and other government-backed securities like T-bills are extremely low-risk and are considered an excellent hedge against inflation.

To fight inflation, the US government closely monitors the y field of T-bills; when inflation is on the rise, the government increases the interest rates on T-bills and other treasury securities. This way, investors are more likely to park their money safely in treasuries instead of spending it and contributing to inflation.

Another benefit of T-bills is diversification. The stock market is excellent for generating wealth, but diversifying beyond it is always a good idea – especially if you’re nearing retirement and want to adjust your investing strategy towards safer investments.

Do Treasury Bills Pay More Than CDs?

No – in general, a Certificate of Deposit (CD) will offer a higher yield than a T-bill or any other treasury security. Both treasury bills and CDs are very safe investments, but they have some key differences.

For starters, CDs are highly illiquid investments. When you purchase a CD, you’re basically lending your money to a bank. The bank pays you a small interest for the loan – and your principal at the end of the term –and in the meantime, invests your money to generate a profit for themselves. 

However, banks pick these investments based on the terms of the original loan. So if you purchase a 1-year CD, the bank will find an investment with a 1-year term to generate the most profit. That means that in most cases, you won’t be able to withdraw your money early, as it’ll be invested already.

It’s very common for banks to have a minimum holding period where you can’t liquidate your CD. Even if you try to liquidate after that period, you may be subject to very hefty fees, as the bank passes along any early withdrawal fee from their investment.

What Is An Example Of A Treasury Bill Ladder?

Imagine you have a big purchase coming up in about a year and already have the money. You don’t want it to sit in a bank account – even a savings account won’t yield as much as treasury bills. So you decide to purchase T-bills to generate some extra money while waiting.

Let’s say you have $15,000. You can use $5,000 to buy a 3-months treasury bill, $5,000 to buy a 6-month treasury bill, and $5,000 to buy a 9-month treasury bill. After three months, you will receive back your principal – plus interest – from the first treasury bills.

You can reinvest that into a 9-month treasury bill – and repeat every three months – if the interest rates are high. If the interest rates are going down, you may want to invest in the stock market or choose a more profitable investment.

Are Bond Ladders Better Than Bond Funds?

If you’re looking to invest in bonds, setting up a bond ladder is the way to go. Bond ladders work just like T-bill ladders – you purchase bonds with staggered maturity dates and secure a consistent interest payment. After each bond matures, you can just purchase a new bond with the current interest rate.

The major downside of investing in bond ladders yourself is that it requires some knowledge and time to set it up. Purchasing individual bonds can be expensive, ranging from $25-$10,000, and they’re highly illiquid investments. After you purchase a bond, it may be tough to sell.

If that sounds like it’s too complicated for you, you may want to try bond funds first.

Bond funds are just like regular stock funds – managed by professional investors. Bond fund portfolios comprise hundreds of diversified bonds. Bond funds pay out regular dividends to investors and are funded by the bonds in the portfolio paying out interest or reaching maturity. Investing in a bond fund or bond ETF is a lot cheaper than investing in dozens of bonds all by yourself.

The biggest downside of investing in funds instead of setting up a bond ladder yourself is the fees. Bond mutual funds and bond ETFs are professionally managed investments, and managers have to make a living. So they charge an asset management fee, usually a small percentage of your deposit or the profits they make you.

Our Recommendation

If you’re still not sure whether ladders or funds are for you, here are our recommendations:

• If you don’t have a lot of experience investing and would rather let a professional take care of everything, a bond fund or ETF is for you.

• If you have a lot of experience investing and are comfortable spending thousands of dollars on building a stable source of income, a bond ladder is for you.

• If you don’t have a lot of money to invest but would like to gain exposure to this market, bond funds and ETFs offer the lowest minimum investments to participate.

• If you prioritize liquidity in case of an emergency over the total yield, then you should invest in a bond ETF.

Are Treasury Notes Good For Retirement?

Yes – treasury notes, bonds, and bills can be an excellent way to generate an income stream for retirees. Experts recommend that as you grow older, your portfolio should favor safer, more conservative investments. That’s because as you grow older, you won’t have as much time to recover from a potential setback before retiring.

Treasury investments allow for very safe investments while maintaining a regular income stream in the form of interest payments. Additionally, treasury securities are backed by the US government, which is very unlikely to ever default.

That’s why setting up a T-bill ladder and securing an income stream after your employment checks stop is an excellent idea. Alternatively, you can look into a type of treasury bond known as inflation-protected T bonds. Inflation-protected bonds offer a fixed yield just like regular T-bonds, but a portion of its total yield is linked to inflation. This ensures that even if inflation rises, you won’t ever lose money.

Are Treasury Bills Good During Inflation?

It depends – if you set up a T-bill ladder with terms ranging from 3-9 months, inflation will have minimal impact, as you can always purchase new T-bills as they reach maturity.

However, since the yield of T-bills is so low, you may be better off with some higher-yielding investments like stocks or ETFs.

Which Banks Sell Treasury Bills?

You can purchase treasury bills, bonds, and notes from any Federal Reserve Bank or the Treasury Department by visiting the TreasuryDirect website.

Is There a Risk Associated With T-Bills?

T-bills are the benchmark for zero-risk investments. With that being said, all investments carry some risk. T-bills, in particular, have a low yield, so inflation and an increase in interest rates could mean that you lose most of your profits. However, if you set up a T-bill ladder, you can mitigate interest rate risk and buy new T-bills with the current interest rate.

FAQs

Are T-Bills Tax Exempt?

T-bills are not subject to local income taxes. T-bills and all other treasury securities – bonds, bills, and notes – are only taxable at the federal level. If you invest in any of these, you will need to file a Form 1099-INT at the end of the year.

Treasury securities are a good alternative to CDs and are particularly attractive if you live in a state with high local tax rates.

What Is The 3 Month T-Bill Rate?

In 2023, the rate of 3-month T-bills started at 4.20% in January – a considerable increase compared to September 2022’s 3.40% – and has since climbed to 5.20% in Q2 2023. Keep in mind that treasury bills and other low-yielding investments are highly dependent on the market and, more specifically, rising interest rates. 

Treasury investments should comprise a part of your investing strategy to add stability, but diversification is key if you want to grow your wealth.

Are Bonds Better Than Treasury Bills?

If you’re looking for the highest yield, treasury bonds are better than treasury bills. Treasury bonds aren’t as liquid as treasury bills, and they pay interest in their lifetime, usually twice a year. Treasury bond terms range from 10 to 30 years.

Similar to CDs, treasury bonds have a minimum holding period of one year. If you try to liquidate before the 5-year, you can get penalized and lose the last three months of interest you would otherwise earn.