Building a T-Bill Ladder

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stuper1
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Building a T-Bill Ladder

Post by stuper1 » Thu Mar 14, 2013 10:25 pm

Is there a consensus on the best proportion of 1/3/6/12-month T-bills for a ladder?
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AgAuMoney
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Re: Building a T-Bill Ladder

Post by AgAuMoney » Fri Mar 15, 2013 12:02 am

Consensus?  Don't want much do you!  ::)

The bills used to be by weeks.  But when I was laddering they didn't have a 1yr...  Is that one 52 weeks or is it actually one year?  I'll assume all are weeks...

With 1 of 4wk bills you have a bill maturing every 4 weeks, or 13 times a year.  You'll earn nothing or less than nothing.

With 13 of 52wk bills you can have a bill maturing every 4 weeks, or 13 times a year.  You'll maybe earn a little something, and have a lot more money rotating with the same number of transactions.

I don't know how much money you are dealing with (and do not want to) so this is just a sketch...

Personally my goal would be to have a bill maturing every week.  Ideally all 52wk bills, so 52 of them.  If that isn't doable, then every 2 weeks or every 4 weeks.  That would be a minimum 13x 52wk, so one per 4 weeks, and growing to 52 for one per week.

If not immediately doable, I'd work up to that goal.  If couldn't do 13x 52wk bills, then fewer for shorter terms. E.g. 6 or 7 26wk bills at 4wk intervals accomplish the same thing.  Or maybe you want first to get 2wk intervals so you do several 13wk bills.

Initially start with a mix of shorter term, then rolling those into the targeted longer term as they mature.
stuper1
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Re: Building a T-Bill Ladder

Post by stuper1 » Fri Mar 15, 2013 7:38 am

I'm a bit confused by your response, which is probably my fault because I'm very new at this.  Let me make it a bit more concrete.  Let's say I have $20,800 to put into this rolling ladder.  I want bills to mature each week.  I could buy a $5,200 4-wk bill for four consecutive weeks and be done with it.  Or, I could still buy each week, but I could reduce the dollar amount of 4-wk bills and buy some 13/26/52-wk bills also.  For example, to spread the purchases out over a year, each week I could buy a $100 4-wk bill, a $100 13-wk bill, a $100 26-wk bill, and a $100 52-wk bill.  That would give me a 1:1:1:1 ratio of 4/13/26/52-wk bills.  But if a different ratio is considered optimal for PP "cash" purposes, then it would be simple enough to achieve that.

I'm trying to figure out whether, for PP purposes, there is an optimal mix of 4/13/26/52-wk bills to hold as PP "cash" in this rolling ladder.
Last edited by stuper1 on Fri Mar 15, 2013 7:42 am, edited 1 time in total.
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WildAboutHarry
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Re: Building a T-Bill Ladder

Post by WildAboutHarry » Fri Mar 15, 2013 8:44 am

A ladder is designed to obtain something around the current longest-rung-of-the-ladder rate with a maturity/duration that is less than the longest rung of the ladder.

If you want to have a "rung" maturing monthly, for example, you could buy twelve 1-year T-Bills, one per month, then reinvest monthly thereafter in a 1-year bill.  So you would only buy 1-year bills.

To start a ladder you can buy the longest-rung bill plus intermediate rungs to fill the ladder, or you can simply hold cash and buy a new long rung at the appropriate interval.

The Treasury periodically messes with their offerings.  As AgAuMoney mentioned, they did away with the 1-year bill for a while, so you really cannot count on the consistent availability of the appropriate Treasury products.

Ladders are an interesting concept but something of a bother to run.  I do keep some emergency cash in a five-year CD ladder.
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Re: Building a T-Bill Ladder

Post by rhymenocerous » Fri Mar 15, 2013 11:29 am

Don't make things more complicated than they need to be.  Take your $21k and buy $7k each of 1yr, 2yr, and 3yr treasuries.  When the 1yr is up, use that money to buy a 3yr treasury and repeat.
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Re: Building a T-Bill Ladder

Post by Pointedstick » Fri Mar 15, 2013 11:41 am

rhymenocerous wrote: Don't make things more complicated than they need to be.  Take your $21k and buy $7k each of 1yr, 2yr, and 3yr treasuries.  When the 1yr is up, use that money to buy a 3yr treasury and repeat.
+1. The secondary market is so liquid that you can sell at any time, and if interest rates rise dramatically, you only have to wait less than a year to be able to take advantage of it.
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Re: Building a T-Bill Ladder

Post by Tortoise » Fri Mar 15, 2013 4:00 pm

Pointedstick wrote:
rhymenocerous wrote: Don't make things more complicated than they need to be.  Take your $21k and buy $7k each of 1yr, 2yr, and 3yr treasuries.  When the 1yr is up, use that money to buy a 3yr treasury and repeat.
+1. The secondary market is so liquid that you can sell at any time, and if interest rates rise dramatically, you only have to wait less than a year to be able to take advantage of it.
+2. Harry Brown would approve. Simpler is usually better. And if you want a little less interest rate volatility than the 3-year ladder, just buy a single 1-year Treasury and replace it once a year when it matures.
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KevinW
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Re: Building a T-Bill Ladder

Post by KevinW » Fri Mar 15, 2013 4:25 pm

Tortoise wrote: And if you want a little less interest rate volatility than the 3-year ladder, just buy a single 1-year Treasury and replace it once a year when it matures.
This is what I would do if I were buying T-bills directly.
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Re: Building a T-Bill Ladder

Post by MachineGhost » Fri Mar 15, 2013 10:24 pm

stuper1 wrote: Is there a consensus on the best proportion of 1/3/6/12-month T-bills for a ladder?
No consensus, but I would do a 1,2,3,4,5-year Treasury or CD ladder which has an average duration of 2.93 years, i.e. it would lose or gain 2.93% for every 1% increase or decrease in interest rates.  If there are 3/6/9 terms available, I would throw them in too for good measure.  Just split the 1-year into quarters.
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Re: Building a T-Bill Ladder

Post by AgAuMoney » Fri Mar 15, 2013 10:51 pm

WildAboutHarry wrote: Ladders are an interesting concept but something of a bother to run.  I do keep some emergency cash in a five-year CD ladder.
Treasury Direct and some brokers make a Treasury ladder pretty easy.  Most banks also with CD ladders.  Once you get them set up, you can have them automatically reinvest your money into basically the same thing every time one matures.  At that point they just run and pretty much take care of themselves unless you want to tweak things.

Treasuries are a bit messy because of the purchase increments at which you buy at a discount and get paid the full amount at maturity (e.g. 1yr, $1000 face, you buy at $990 and get $1000 at the end of the year would be a 1% yield).  Result is every reinvestment you end up with a bit of loose change rattling about the account.  Eventually it adds up and you can start another one...
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Re: Building a T-Bill Ladder

Post by Kriegsspiel » Sat Mar 16, 2013 12:41 am

I buy 1, 2, and 3 year treasuries.
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Re: Building a T-Bill Ladder

Post by BearBones » Sat Mar 16, 2013 8:39 am

I keep ladder of 52 wks and less. Not much benefit to going longer at current rates, IMO. When/if rates "normalize" I like the idea of a 3 or 5 year ladder. And I like the ideas about keeping it simple.
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