How To Build A T-Bill Ladder In 2023

What are Treasury Bills?

Treasury Bills, or T-bills, are short-term debt securities issued by the US government. The terms can range from 4 weeks to 52 weeks. One unique thing about T-Bills is that they are sold at a discount from their face value. If it says 5%, you won’t see a line item in your transaction history that says “interest.” You make money by buying the T-Bill at a discount. So for example, I can buy a $100 Treasury Bill for $97 ($3 discount), then I get the full $100 when it matures. That’s how I make money.

What are the advantages of Treasury Bills? 

• Almost zero risk: Treasury bills are low-risk short-term investments that the federal government guarantees. I say almost zero risk because every now & then Congress threatens to shut down the government and stop paying on its debt.
• Tax exemption: T-bills are exempt from state and local income taxes. However, they are subject to federal income taxes.
• Highly liquid: They can easily be bought and sold on the market.
• Low minimum investment requirement: This makes T-Bills accessible to many individual investors.

What are the risks associated with T-Bills?
While T-Bills are generally considered safe investments, there are still some risks to consider.

• Inflation: T-Bills are less attractive to investors in highly inflationary times. Inflation can erode the value of the investor’s returns.
• Interest rates: T-Bills become less attractive when interest rates rise because investors can get a higher interest rate elsewhere.
• The opportunity cost of not investing in other asset classes: T-Bills are generally considered risk-free because you are guaranteed to get your money back. However, they may provide a different potential for capital appreciation than other investments, such as stocks or mutual funds.

How do you buy T-bills?

You can buy T-Bills through the TreasuryDirect website or you can purchase them through a brokerage account.

• Buying T-Bills through TreasuryDirect

1. To open an account you will need a US address, a social security number, and a bank account.
2. T-bills are sold via auction. There are two types of investors. Competitive investors place a bid at their desired rate or yield. A non-competitive bidder accepts the going rate established in the auction. Once the auction closes, all of the non-competitive bidders get their order first. Once all of the non-competitive bidders have had their orders fulfilled, then the competitive bidders will get their orders starting with the lowest bid. 
3. A TreasuryDirect account functions just like a brokerage account. Upon bid acceptance, your bank account is debited and T-Bills are deposited into your TreasuryDirect account. When the T-bill matures, the par value is automatically credited to your bank account.

• Buying T-Bills through a broker such as Fidelity or Vanguard
  If you already have a brokerage account with a firm like Fidelity or Vanguard, then it may be easier to order T-Bills through your broker. You will need to make sure that you have funds in your brokerage account to buy T-Bills. Once there are funds in your account, then you can place an order to purchase T-Bills. This is usually done through the broker’s online trading platform or by speaking with a representative on the phone.
  
  

What is a Treasury Bill ladder?

A Treasury Bill ladder is an investment strategy that involves spreading your money across several Treasury Bills with staggered maturity dates. The goal is to have a portion of the portfolio mature every few months or so, creating a steady stream of income. It gives you the chance to reinvest at higher rates as terms expire or to allocate the funds elsewhere. For example, let’s say you have $20,000 in extra cash.  You can use $5,000 to buy a three-month Treasury bill, another $5,000 for six months, then buy 9 & 12 months with the remaining money.

In three months, when the first bill has matured, you can take a look at the current interest rate. If the rates are still high, then you can re-invest that $5,000 (plus the interest you earned) into another T-Bill. This allows you to take advantage of interest rates as they rise. If the rates have are tumbling, then you can re-evaluate your options. 

Full Disclosure: As a financial advisor, I am building one for my wife and I. 

What are the advantages of a T-Bill ladder?

• Liquidity: Investors who build a T-Bill ladder can receive the benefit of earning the higher interest rates of longer-term investments while also being able to have some liquidity. By investing in this strategy, investors can access their cash regularly without having to sell their entire portfolio.
  

• Diversification: Building a diversified investment portfolio is essential. One way to achieve diversification is through a T-Bill ladder. A T-Bill ladder helps diversify an investor’s portfolio by spreading their investments across different maturity dates. It can help to mitigate interest rate risk, as the investor is not locked into a single maturity date.
  
  We don’t really know if interest rates will stay the same, continue to rise, or go down in 2023. By building a Treasury Bill ladder, if interest rates go up in three months, by then, your three-month Treasury Bill will mature, then you can use that proceeds to buy a higher-yielding Treasury Bill. If interest rates go down in the next couple of months, then, you will have locked your money at a higher rate because you bought a nine and a 12-month Treasury Bill.
  
  
• Predictable income: An investor can create a predictable income stream with a Treasury Bill ladder. This is achieved by reinvesting the principal and interest payments from maturing T-Bills into new T-Bills with longer maturities. Investors seeking stable returns can benefit from this type of investment.
  
  

What are the disadvantages of a T-Bill ladder? 

• Limited maturities: T-Bills are typically issued with maturities of one year or less. This can be less attractive to investors who are looking for longer-term investment options.

• Interest rate risk: Treasury Bill ladders can mitigate interest rate risk, but they remain susceptible to changes in interest rates.  If interest rates rise, the value of the longer-term Treasury Bills may temporarily go down.
  
  

How do you make a Treasury Bill ladder? 

Building a T-Bill ladder is relatively simple. You need to purchase several T-Bills with staggered maturity dates. 

You can buy & build a T-bill ladder through most brokerage firms or through treasurydirect.gov. You can also set up an automatic laddering system on the US Treasury website so you won’t have to worry about micromanaging your investments. I personally like using Vanguard. I find their platform easy to use. 

How to build a Treasury Bill ladder with Vanguard:

1. Once you’re logged in, click on My Accounts, then click Buy & Sell under Transactions
2. Then click on Trade bonds & U.S. Treasuries, under CDs & bonds.
3. Click on one of the rates across Treasuries.
4. Choose the maturity of your liking
   
5. You can select a specific US Treasury Bill. 
6. Input amount. In $1,000 increments.
7. Review your Order. Click on ‘Submit Purchase’.

What are T-Bills currently yielding? 

Three & six-month Treasury Bills are currently giving a yield of over 5%. This yield is higher than a CD at Wells Fargo, and higher than a 3 or 6-month CD in high-yield bank accounts. If we look at the 9 & 12-month T-Bills, they are also over 5%. 

If you factor in the fact that you don’t pay state and local income taxes, Treasury Bills still will yield an even higher net return than a regular CD.

Are T-Bills or Brokered CDs paying more?

As of June 2023, T-Bills are paying slightly more than brokered CDs for 1-6 months. A 1-3 month T-bill is paying 5.36% compared to a 1-3 month brokered CD of 5.30%. However, for 7-18 months, brokered CDs are paying more than T-Bills. 

Do you pay tax on T-Bills?

Yes, Treasury Bills are taxed at the federal level using your marginal income tax rate. However, they are not subject to state tax or local income taxes. Make sure that you consult your tax advisor for more information.

What types of Treasury Bills exist?

There aren’t different types of Treasury Bills. Instead, there are T-Bills with various maturity dates. These can range from as little as 4 weeks to 12 months. 6-month and 12-month T-Bills are often referred to as “on-the-run” T-bills because they are the most liquid. 1 month, 3 months, and 9 months are often referred to as “off-the-run” as they are less liquid and they are not as attractive to investors.

When is interest on a Treasury Bill paid out?

T-Bills don’t have interest payments. Instead, they are sold at a discount from their face value, and upon maturity, the face value of the bill is paid out. For example, if you purchase a 6-month T-Bill Treasury Bill with a face value of $20,000 at a discount rate of 2%, you would pay $19,600 for the bill upfront. At maturity, you would receive the full face value of $20,000, and the $400 difference between the face value and the discounted price represents your interest payment.

The difference between what an investor pays for the bill and the face value is the return. This return is what some people call “interest”.

Can you lose money in T-Bills? 

T-Bills are considered a low-risk investment as they are backed by the US government. T-bill investors can rest assured that their investments will not be lost. You can lose money in T-Bills if you buy a 1-year T-Bill, then interest rates go up and the price of your T-Bill goes down, and you sell it before it matures. If you hold it to maturity, then you will get your full principal and “interest.”

Treasury bills vs Treasury notes: which is better?

Treasury Bills (T-Bills) and Treasury Notes (T-notes) are both types of debt securities issued by the U.S. Department of the Treasury, but they differ in their maturity and other characteristics.

• Maturity: T-bills have short-term maturities which are usually less than a year. T-notes have longer-term maturities, usually 2, 3, 5, 7 or 10  years.
• Higher discount (interest) rates: Treasury notes typically have a higher discount (interest) rate than Treasury Bills.
• Issuance: Treasury bills are issued with maturities of 4, 8, 13, 26, or 52 weeks. T-notes are issued with maturities of 2, 3, 5, 7, or 10 years.
• Minimum investment: T-bills have a minimum investment of $100 and T-notes have a minimum investment of $1,000.

T-bills and T-notes both have advantages and disadvantages, but it is up to the individual investor to decide which is best. A financial planner can help you decide the best investment strategy for your unique situation.