Question on Treasury Ladder

Discussion of the Cash portion of the Permanent Portfolio

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Jeffreyalan
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Question on Treasury Ladder

Post by Jeffreyalan » Sun Jul 16, 2017 9:55 pm

I am going to set up a bond ladder at Treasury Direct and was wondering what everyone's opinions are about the length of the ladder. 1 year, 3 year or 5 year or more? This is not for the PP cash specifically. Just for some medium to deep cash.

Thanks!

Jeffrey
grapesofwrath
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Re: Question on Treasury Ladder

Post by grapesofwrath » Mon Jul 17, 2017 3:48 am

I have been setting up ladder held at Treasury direct. My target maturity was 5yr but now gradually increasing to 7yr (max). I don't hold "cash" nor any bonds with maturity greater than this (rate risk outside my comfort zone) other than ee bonds. My portfolio is more Swedroe/Desert like.
I vaguely recall a rule-of-thumb (swedroe?) that one should look for incremental yield/maturity of ~20bp/year.
I also vaguely recall (bernstein?) that long term historically 10yr return was not significantly better than 5yr.
So for me this middle range seems sweet spot for risk-return.
Pet Hog
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Re: Question on Treasury Ladder

Post by Pet Hog » Mon Jul 17, 2017 4:11 am

I would choose a 5-year ladder. For deep cash, you are unlikely to ever have to touch it. So I would aim for a higher yield (longer maturity) and hold each rung to maturity. But not too long that interest rate fluctuations affect the value of the bonds too much. Five years seems a good compromise to me. Actually, that's what I do with my own laddered "treasury cash" (at Fidelity, not Treasury Direct).
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Hal
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Re: Question on Treasury Ladder

Post by Hal » Mon Jul 17, 2017 4:58 am

If you can find Clives posts from a few years back, he went into this in some detail.
Maybe you can use the wayback machine https://archive.org/web/ if they have dropped of this site.

From memory.....

He suggested using a five year bond ladder to replace the cash/LT section of the PP.
What I can remember for sure is that he also suggested "Rate Tarting" - how could you forget that term!
This was where you purchased the bond with the highest yield, not just to longest dated bond, when another bond matured.

Perhaps some of the veterans on this site can remember more .....
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jhogue
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Re: Question on Treasury Ladder

Post by jhogue » Mon Jul 17, 2017 8:57 am

Jeffrey,
I favor a shorter maturity—1 year or less—for your Treasury ladder. For the PP, a “barbell” of maturities has served investors in the PP well. In other words, try to keep your short term Treasurys short and your long term Treasurys long.

A shorter maturity should also keep your Treasury bills less volatile and increases the chance that you can sell them-- if you need to-- without any loss of your principal.

For a minor sacrifice of one year’s liquidity upfront, you could also think about starting a ladder of I bonds. The current I bond rate is 1.96%, compared with 1.25% for a 1 year Treasury bill. The I bond rate automatically resets twice a year (in May and November). I bonds are also available at Treasury Direct. This could a valuable feature for you if short term rates rise in the near term—as Federal Reserve chair Janet Yellen signalled Congress in her testimony before Congress this past week. PP investors don’t try to predict the bond market’s future moves, but unlike General Custer at the battle of the Little Big Horn in 1876, there is nothing wrong with listening to the scouting reports while there is still time to react to what’s over the next hill.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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