Short Term Treasury Ladder Strategies

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Gumby
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Short Term Treasury Ladder Strategies

Post by Gumby » Tue May 17, 2011 9:23 pm

Lone Wolf mentioned that he uses Fidelity for a homemade 0-3 year Treasury ladder. That sounds like a relatively straightforward way to create your own money market fund without any expenses (Fidelity doesn't charge fees on any Treasuries). But, I'm not 100% sure about what the best approach is. Curious to hear what people think.

I believe Harry Browne simply recommended purchasing 1 Year Treasury Notes once a year (though I could be wrong about that). On the other hand, interest rates are not what they used to be.

Many PP holders seem to prefer a 0-3 year Treasury Ladder to reach a slightly better yield. So how many "rungs" should one work with in a 0-3 year Treasury ladder? Is one rung for each year adequate?

And would a 0-3 year Treasury Ladder would be too risky if interest rates were to ever rise very quickly?
Last edited by Gumby on Tue May 17, 2011 9:28 pm, edited 1 time in total.
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WildAboutHarry
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Re: Short Term Treasury Ladder Strategies

Post by WildAboutHarry » Wed May 18, 2011 8:24 am

I've considered using a five year T-Note ladder (15%) mixed with SHY or shorter treasuries (10%).

Unless you use a treasury money market fund you always have some risk of loss with purchase of bills, notes, or bonds, if you have cash needs prior to maturity.  Obviously 100% of a one-year bill is available each year, 1/3rd of a three year ladder, 1/5th of a five year ladder, etc.

I'm not fully into the PP (big toe, well, small toe only so far), but my understanding is that re-balancing is a fairly infrequent occurrence.  Stretching for yield a bit using longer T-Notes in the cash portion doesn't seem like it would "void the warranty" so long as there is sufficient cash available for re-balancing needs. 
It is the settled policy of America, that as peace is better than war, war is better than tribute.  The United States, while they wish for war with no nation, will buy peace with none"  James Madison
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Re: Short Term Treasury Ladder Strategies

Post by Lone Wolf » Wed May 18, 2011 9:57 am

Sure, I'd be happy to share my approach.  Your description of what I do is correct -- I crawl a bit further out on the yield curve by purchasing Treasuries that are between 0-3 years in maturity.  I'll discuss how I do it first.

I have three rungs: <= 1 year, <=2 years, and <=3 years to maturity.  When I purchase a Treasury Bill or Note, I put it into my big Permanent Portfolio spreadsheet along with its maturity date.  The spreadsheet calculates what rung the T-Note is a member of.  It does this by subtracting today's date from the maturity date of the Note and then seeing whether it is <=365 days to maturity, <= 730 days to maturity, or longer.  (I don't hold anything longer than 3 years from maturity.)

I more or less equally weight each rung.  The spreadsheet calculates the size of each rung and its current percentage.  It also calculates how much of a "shortage" or "surplus" each rung has.  I generally just buy into the rung that has the greatest shortfall (typically the 3-year rung) and try to keep things even-ish.  I doubt there's much need to get overly freaky about this, though.  So for example if I found that enough time had passed that my 3-year rung had gotten short by $3,000, I would just buy any T-Note that is slightly less than 3 years from maturity.  I pop that new purchase into the spreadsheet after I buy it and I'm all set.

I also have a column that alerts me when a security should have matured so that I can remove it from the list (and probably go buy something else.)  In addition, you want to make sure that matured securities aren't counted in the ladder at all, so I define the 1-year column like:

Code: Select all

=IF(AND(H62>= 0,H62<=365),D62,0)
I'll also write up a bit on my rationale for choosing a ladder.  I'd be interested to hear anyone's thoughts on laddering, for or against, as my mind remains open.
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Re: Short Term Treasury Ladder Strategies

Post by Lone Wolf » Wed May 18, 2011 10:12 am

I also want to talk a bit about why I am comfortable with Treasury laddering versus simply holding very short-term T-bills.  The reason that I am personally comfortable doing this is that historically speaking, you've got about a 1% interest rate premium on Treasury securities from the 3-year range versus the 3-month range.  If interest rates rise, you still get to purchase at the high rates at the top rung.

To get comfortable, I look at a really bad situation for a ladder such as 1981.  1981 was the famous "inflation-killing" period of very high rates and an inverted yield curve.  3-month T-bills were getting 15.5%.  3-years were getting only 13.65%.  Assuming that all rungs are 3-year Treasuries, your 2-year rung would have been getting 10.7% and your 2-year rung 9.3%, giving you a mean yield of 11.22%, leaving you 4.3% short for that year.  The T-bills clearly win, as we'd expect for an inverted yield curve.

However, by the next year, 3-month T-bills were yielding 10.85% and 3-years were at 13.66%.  This means that your ladder is now averaging 12.21%, once again beating pure T-bills.  The year after that, it's 7.94% for the T-bills versus 12.4% for the ladder (as the effects of 1981's high interest rates "linger on" for the ladder.)  So you can see that the problem corrects itself pretty quickly, even in a very tough situation.

The remaining danger is sudden levels of catastrophic hyperinflation that come out of nowhere to tear apart the value of the dollar.  In a situation like that, rolling quickly into new T-bills will do a better job of protecting you than the ladder.  A "smoother" acceleration into hyperinflation over a period of years would likely be better for the ladder.

Why else wouldn't Browne recommend T-bill ladders versus the Treasury Money Market Fund?  I suspect that the reason is that it would have been an incredible pain in the butt without Fidelity, Schwab or (presumably) TreasuryDirect there to let you do all this online.  In addition, the Permanent Portfolio as Browne has arranged it literally requires no more than yearly attention.  It's like a tough but very attractive plant that grows on its own and seems to survive any sort of weather.  You don't really need to do anything to it but if you feel like giving it a trim once in a while it'll look ever so slightly better.  But it's only worth doing if you enjoy this sort of thing.  Otherwise, just go with SHV\SHY and live your life.

However, I do have to say that I still can't see the appeal of a Treasury Money Market fund versus manual Treasury purchases or SHV\SHY.  The American Century Fund has a .48% expense ratio.  If you had $100,000 in your "cash" allocation, expenses would eat $480 a year.  Over 10 years, that's paying someone nearly $5000 to sit on T-bills.  To me, that's just not acceptable.  I couldn't stand it.  (SHV and SHY would be a more modest $150 per year.)

By the way, this is my source for interest rate information if anyone else digs this sort of thing: http://www.federalreserve.gov/releases/h15/data.htm
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Re: Short Term Treasury Ladder Strategies

Post by Storm » Thu May 19, 2011 8:17 am

Great idea, LW. I appreciate the thought that went into this strategy, especially consideration of the inverted yield curve in the 80s- we are far away from that, but history does sometimes repeat itself and I could see the next few years leading to a hyperinflationary environment which might cause the Fed to introduce some of the same high yield instruments to pull money out of circulation as before.

One thing I thought I would mention, and wanted to get your thoughts on - I purchase my treasuries from Fidelity as well (for LT treasuries) - and I have noticed that even though it is free to purchase treasuries, there is a difference between the bid and ask prices.  So, if you were not holding your treasuries to maturity, there is actually a cost involved when you sell them later.  With this in mind, how do you stay liquid enough if you hit a rebalancing band?  Let's say that your cash grows to 35% and you need to buy some lagging asset.  For me, this happens frequently because my 401k goes to cash first.  Would you try to avoid this scenario by letting some components of your ladder mature and keeping it around 25%?  Or would you go ahead and sell some of your ladder to purchase the lagging asset?

Thanks for your thoughts on this - I might like to implement something like it, but I need to better understand how I would remain liquid enough to purchase lagging assets in the event of a fire sale.
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Re: Short Term Treasury Ladder Strategies

Post by WildAboutHarry » Thu May 19, 2011 9:21 am

Storm wrote:Thanks for your thoughts on this - I might like to implement something like it, but I need to better understand how I would remain liquid enough to purchase lagging assets in the event of a fire sale.
Some split between individual treasury notes/bonds and a fund would give you the ability to liquidate the fund in the event you needed to rebalance.  See Clive's points about the needs for cash being historically low in a PP.

There are bid/ask spreads buried in fund costs as well, although obviously the big guys get better spreads than the typical individual investor.

MediumTex recently used a phrase somewhere about core assets or something like that in PP assets.  Physical gold and individual treasuries need never be liquidated (except LT treasuries periodically) if they are combined with more trade-able forms.
It is the settled policy of America, that as peace is better than war, war is better than tribute.  The United States, while they wish for war with no nation, will buy peace with none"  James Madison
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Re: Short Term Treasury Ladder Strategies

Post by Lone Wolf » Thu May 19, 2011 9:49 am

Thanks, Storm, glad you found it interesting.
Storm wrote: One thing I thought I would mention, and wanted to get your thoughts on - I purchase my treasuries from Fidelity as well (for LT treasuries) - and I have noticed that even though it is free to purchase treasuries, there is a difference between the bid and ask prices.  So, if you were not holding your treasuries to maturity, there is actually a cost involved when you sell them later.  With this in mind, how do you stay liquid enough if you hit a rebalancing band?
The bid-ask spreads are pretty tight on these securities so I don't worry too much about this.  For example, one of mine has a bid of 102.328 and an ask of 102.312.  That works out to a .0156% cost.  To put that in perspective, if you bought and then immediately sold $1,000,000 of T-Notes, you'd lose $156 to the bid-ask spread.  (And my transactions have a lot fewer zeros than that, unfortunately!)  On $1,000, it's 15 or 16 cents.

On the other hand, if you take a Treasury Money Market Fund with an expense ratio of .48%, your $1,000,000 would shed $4800 each and every year!  (The Permanent Portfolio family of funds offers a Treasury Money Market that has an expense ratio of .71%, which really floors me.  Am I in the wrong business?)
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Re: Short Term Treasury Ladder Strategies

Post by Gumby » Thu May 19, 2011 10:12 am

Thanks for the information LW and Clive. I have to admit that I've already tried creating a small 0-3 year ladder in one of my IRA's last month, but I didn't use anything near that level of sophistication, in terms of using a spreadsheet. I just spaced my treasuries out every 6 months or so and selected the best rate I could find in each rung. I figured I would just replace each rung as it matured (i.e. setting a reminder in my calendar to replace rungs as needed). I can see the advantage of keeping things even with a spreadsheet, but I'm not sure I want to devote that kind of attention to it. And I'm not really sure I can build a spreadsheet with that kind of sophistication coded into it. I suppose I'd still save money even if I didn't try to optimize it with a spreadsheet.

In terms of Fidelity's other options, I see my account has FCASH and Fidelity Cash Reserves. I haven't looked in the past few months, but I seem to remember that you actually lose money with Fidelity Cash Reserves (since the expense ratio is bigger than the interest/dividend). But, what's the deal with FCASH? Is that the equivalent of putting cash in a checking account? Or is there an expense ratio involved with FCASH as well? It seems obvious to me that the Treasury Ladder is the most efficient way to hold Cash, but I just want to get an idea of just how good/bad the other Cash options are that Fidelity offers.
Last edited by Gumby on Thu May 19, 2011 10:15 am, edited 1 time in total.
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Re: Short Term Treasury Ladder Strategies

Post by Lone Wolf » Thu May 19, 2011 10:49 am

Gumby wrote: I can see the advantage of keeping things even with a spreadsheet, but I'm not sure I want to devote that kind of attention to it. And I'm not really sure I can build a spreadsheet with that kind of sophistication coded into it. I suppose I'd still save money even if I didn't try to optimize it with a spreadsheet.
Definitely no need to set up a giant spreadsheet if that sort of thing doesn't appeal to you.  I just love having my little Permanent Portfolio "Command Center" that lays it all out for me.  A tiny man ruling a tiny kingdom.

Also, you don't generally need to worry about the interest rate stamped on the note, just the duration.  The Treasury market is so efficient that any notes with the same time to maturity are already going to be priced so that they're paying more or less the same.
Gumby wrote: In terms of Fidelity's other options, I see my account has FCASH and Fidelity Cash Reserves. I haven't looked in the past few months, but I seem to remember that you actually lose money with Fidelity Cash Reserves (since the expense ratio is bigger than the interest/dividend). But, what's the deal with FCASH? Is that the equivalent of putting cash in a checking account? Or is there an expense ratio involved with FCASH as well? It seems obvious to me that the Treasury Ladder is the most efficient way to hold Cash, but I just want to get an idea of just how good/bad the other Cash options are that Fidelity offers.
Huh.  I can't say that I really know what FCASH is.

Anyhow, like you said, the Fidelity Cash Reserves are just for money you are waiting to spend for paying bills or buying other securities (since my mortgage company doesn't let me pay them with Treasury Bills!)
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Re: Short Term Treasury Ladder Strategies

Post by Storm » Thu May 19, 2011 11:57 am

Fidelity has a couple options for cash - neither of which seem very good to me.  You can setup the default for your account, or where funds from sales, dividends, etc, go to:

Fidelity U.S. Government Reserves (FGRXX)

YTD Performance as of 05/18/2011 0.00%
1 Year* 0.02%
3 Year* 0.58%
5 Year* 2.21%
10 Year* 2.13%
Life* 4.92%
NAV as of 05/18/2011 1.00
Net Assets ($M) as of 04/30/2011 $2,637.45
7-Day Yield 2 as of 05/18/2011 0.01%
Minimum to Invest 3 $2,500.00 ($2,500.00 for IRA)
Transaction Fee (online) None
Expense Ratio 0.32%

Fidelity Cash Reserves (FDRXX)

YTD Performance as of 05/18/2011 0.01%
1 Year* 0.05%
3 Year* 0.78%
5 Year* 2.37%
10 Year* 2.20%
Life* 5.80%
NAV as of 05/18/2011 1.00
Net Assets ($M) as of 04/30/2011 $115,529.44
7-Day Yield 2 as of 05/18/2011 0.01%
Minimum to Invest 3 $2,500.00 ($2,500.00 for IRA)
Transaction Fee (online) None
Expense Ratio 0.37%
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Re: Short Term Treasury Ladder Strategies

Post by Gumby » Thu May 19, 2011 12:12 pm

Lone Wolf wrote:Huh.  I can't say that I really know what FCASH is.

Anyhow, like you said, the Fidelity Cash Reserves are just for money you are waiting to spend for paying bills or buying other securities (since my mortgage company doesn't let me pay them with Treasury Bills!)
It seems our Core accounts are configured differently. FCASH is the default "Core" sweep account. One can change their Core to a different Money Market Fund if they wish to (yours is configured to Fidelity Cash Reserves). Here is Fidelity's description of FCASH:
For Brokerage accounts, your Core is an interest-bearing cash account called FCASH, unless you specified otherwise when you opened your Fidelity Account. FCASH should be used for cash temporarily awaiting reinvestment; it is not intended solely for the purpose of earning interest. Investors should consider higher yielding investment alternatives for funds not needed immediately. You can change your Core account at any time by calling a Fidelity Representative at 1-800-544-6666. You cannot change your Core account online.
The only thing is that I can't find an expense ratio for FCASH. I believe one loses money with Fidelity Cash Reserves (due to the expense ratio being higher than the interest rate), but it's unclear if one actually loses money with FCASH. I'm thinking that FCASH is really the equivalent of a Fidelity mattress, for temporary sweep transactions. FCASH clearly isn't designed to be a long term investment, but I can't help but wonder if Fidelity Cash Reserves is a ripoff. That leaves us with Treasuries as the only way to actually grow Cash in a cash form.
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Re: Short Term Treasury Ladder Strategies

Post by Storm » Thu May 19, 2011 4:36 pm

Gumby is exactly right.  When I setup my 401k brokerage account, I was specifically asked if I wanted to use FDRXX (default) or FGRXX for my Core account.

Although with interest rates where they are right now, and expense ratios where they are, it seems like all 3 of these options, FCASH, FDRXX, or FGRXX are not worth being in.
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Re: Short Term Treasury Ladder Strategies

Post by Lone Wolf » Thu May 19, 2011 5:04 pm

Storm wrote: Although with interest rates where they are right now, and expense ratios where they are, it seems like all 3 of these options, FCASH, FDRXX, or FGRXX are not worth being in.
Unquestionably.  I didn't even know "FCASH" existed, but I think you can safely assume that these sweep accounts don't ever represent any kind of amazing deal.  Obviously, you can do better for your PP.  I keep enough in there to slosh around for buying various securities and pay the odd bill or two but I think these kinds of funds are just to be used as little slush fund \ checking account thingies.

As for which of these is the best -- don't know!  It's been some years since I set mine up so if anyone has identified a clear winner, please do call it out.
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Re: Short Term Treasury Ladder Strategies

Post by Gumby » Fri May 20, 2011 2:54 pm

I called up Fidelity today to ask them what the expense ratio of FCASH was, and they put me on hold for awhile. Then they apologized profusely because they weren't able to find it. Either it doesn't exist or they just can't find it right now. But, they seemed to think that the 7 day yield on FCASH was actually a bit higher than Fidelity Cash Reserves at the moment.

When I asked them if it was possible to lose money with Fidelity Cash Reserves (with the expense ratio being higher than the yield), the representative didn't think it was possible — though he admitted he wasn't 100% sure. He said that he believed the expenses were taken out of the earning, not deducted directly from the shares. He also pointed out that the yield on Fidelity Cash Reserves was a 7 day yield (of .01%), and the expense ratio was an annual percentage of 0.37%, taken out of the earnings somehow. They're "Apples and Oranges," he explained.

At this point, I'm pretty confused. I admit I'm no expert on how expense ratios work, but does this sound right to anyone else? Maybe someone else can call up and get an answer on this.
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Re: Short Term Treasury Ladder Strategies

Post by Gumby » Fri May 20, 2011 3:08 pm

I set up a 0-3 year Treasury Ladder in an IRA today. Tell me if I did this right...

Here was what the selection of Treasury Notes available looked like:

Image

...and so I purchased an equal quantity of each of the following:

US TREASURY NOTES 1.00000% 04/30/2012; PRICE PER BOND = $1007.891
US TREASURY NOTES 0.62500% 04/30/2013; PRICE PER BOND = $1002.812
US TREASURY NOTES 1.87500% 04/30/2014; PRICE PER BOND = $1029.062

How'd I do? Is that all there is to it?
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Re: Short Term Treasury Ladder Strategies

Post by Lone Wolf » Fri May 20, 2011 3:36 pm

Gumby wrote: I called up Fidelity today to ask them what the expense ratio of FCASH was, and they put me on hold for awhile. Then they apologized profusely because they weren't able to find it. Either it doesn't exist or they just can't find it right now. But, they seemed to think that the 7 day yield on FCASH was actually a bit higher than Fidelity Cash Reserves at the moment.
Funky and interesting.  I'd say this: don't count on any of these being a fantastic investment.  They're tuned to provide liquidity but beyond that I've not seen much evidence they're supposed to be a super investment.
Gumby wrote: ...and so I purchased an equal quantity of each of the following:

US TREASURY NOTES 1.00000% 04/30/2012; PRICE PER BOND = $1007.891
US TREASURY NOTES 0.62500% 04/30/2013; PRICE PER BOND = $1002.812
US TREASURY NOTES 1.87500% 04/30/2014; PRICE PER BOND = $1029.062

How'd I do? Is that all there is to it?
Looks good to me!  Really not much to it.  As your 3-years start becoming 2-years, you'll just keep buying more 3-years.  In 2014 your "1 year" rung will be paying the 1.875% coupon.  Keep it kinda-sorta balanced out and you're all set.  Expense ratio: 0.0%.  :)

For anyone that finds a Treasury Ladder to be too much hassle, a mix of SHV and SHY give you pretty much the exact same thing with slightly less work but one more counterparty and a small but reasonable expense ratio.
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Re: Short Term Treasury Ladder Strategies

Post by Gumby » Fri May 20, 2011 9:08 pm

Clive wrote:Were/are there any better no/low risk alternatives for any/each of the rungs? Perhaps a three year IBond (I'm UK side so I might be talking rubbish here). Or maybe a high street 1 year cash deposit account etc.

Your 1 year for instance assuming held to maturity will yield 1% income but lose out 0.8% in capital value for an overall 0.2%. Maybe a cash deposit account at a local bank might be paying a bit more than that? And if so I'd personally have opted for that higher reward for that rung (assuming the deposit is Fed insured in the event of the bank going broke).
You raise a good point. There are definitely other options in that retirement to eek out another tenth of a percent on that rung (Munis, CDs, Agency/GSE, etc.). I-Bonds are already tax deferred, so they aren't an IRA investment. CDs are typically FDIC guaranteed, but I decided to play it as safe as I could with the 1-year Treasury Notes.

Very interesting idea though.
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Re: Short Term Treasury Ladder Strategies

Post by Lone Wolf » Mon May 23, 2011 7:48 am

Clive wrote: Take a simpler example of in Japan you'd rolled into whatever was the current highest yield out of up to 3 year to maturity, and then just held each purchase to maturity before repeating. Assuming each treasury was bought at a coupon yield = current market yield so that the purchase price = $1000 and maturity value = $1000 then only the yield needs to be considered (capital gains/losses ignored)
...
In total yielded 4.325% average compared to 1.77% average inflation an so produced a 2.47% average real gain.
Hi Clive, I'm surprised that the "rate tarting" (what a great way of putting it) made such a difference here.  If I understand your strategy correctly, this would mean that you are seeking out opportunities to get higher rates with shorter-dated Treasuries.  (Such opportunities were available in the United States in 1981 but are generally a bit rate.)

I am no expert on Japanese interest rates so I don't know much about when they experienced an inverted yield curve.  Can you walk me through how sometimes picking shorter-dated Treasuries made such a big difference in Japan?  That's an amazing difference and nothing like that would have shown up in a US ladder (AFAIK.)
Clive wrote: And that's just selecting the best yield from a limited set (1 2 or 3 year T's). Expand that to a wider set (maybe IBonds, safe cash deposit accounts/bonds etc) and the difference/benefit could perhaps be even more. (Don't forget however you need to hunt out the best NET rate, not just the highest gross rate)
I definitely agree that I-series savings bonds are a great vehicle for cash, although it's not clear to me whether they fit into any particular "rung" in this case.  I think this could be handled however you wanted.

Now your other suggestions seem to step a bit more outside the bounds of what the PP calls "cash".  (I interpreted your suggestions to be savings accounts, CDs, municipal bonds, etc.)  I still have a CD ladder that I'm decommissioning at the moment, and I've seen that CD rates are pretty much always going to be higher than Treasuries (since you have added risks in a CD.)  As soon as you give up the safety of Treasuries, you can certainly expect higher rewards.  Personally, though, I like to risk as little of my "Cash" segment on anything but credit risk-free instruments.
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Re: Short Term Treasury Ladder Strategies

Post by rickb » Mon May 23, 2011 9:31 am

LW - Do you track your overall return from your bonds, and is it essentially identical to SHY but about 0.15% (SHY's expense ratio) more?  SHY tracks a specific index (Barclays Capital U.S. 1-3 Year Treasury Bond Index).  I'd imagine the return from two different collections of 1-3 year bonds might vary by as much as 0.15% due to the composition of the collection.  Just curious if you're actually realizing a DIY benefit.
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Re: Short Term Treasury Ladder Strategies

Post by Lone Wolf » Mon May 23, 2011 9:32 am

Interesting stuff, Clive.  You do some cool things with numbers.  It's not what I'd call a "ladder" in the traditional sense as you've got a lot more "lumpiness" as far as maturity dates go as (if I understand correctly), you've always got the entire bundle maturing at the same time, whereupon you go "all in" at the best current rate until maturity.  A ladder, on the other hand, just generally keeps the "rungs" balanced to achieve high returns with rolling liquidity (which most often means buying at the furthest possible maturity allowed by your ladder.)

The upside to your approach are apparently higher returns, and who doesn't like that?  :)

The downside from what I see would be greater interest rate risk, as you will at times be forced to sell one of these longer-dated Treasury for rebalances or other purchases that require true "liquid cash".  With the ladder, you've always got 1/3rd of your cash pile less than a year out and thus very safe to liquidate.

You didn't happen to run the numbers for a "traditional ladder" in Japan, did you?  Just curious, no need to "do my homework for me" if you didn't try this.  I may have to take your approach for a spin with United States data some time.  When I do, I'll be sure to post the results in this thread.
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Re: Short Term Treasury Ladder Strategies

Post by Lone Wolf » Mon May 23, 2011 9:48 am

rickb wrote: LW - Do you track your overall return from your bonds, and is it essentially identical to SHY but about 0.15% (SHY's expense ratio) more?  SHY tracks a specific index (Barclays Capital U.S. 1-3 Year Treasury Bond Index).  I'd imagine the return from two different collections of 1-3 year bonds might vary by as much as 0.15% due to the composition of the collection.  Just curious if you're actually realizing a DIY benefit.
Hi rick, good question.  I've never tracked my return but I wouldn't be at all surprised by variability in either direction.  I would expect that my ladder would return less than SHY overall because by using a 0-3 year duration, it's operates sort of like a SHV\SHY mix in a 1:2 ratio with presumably slightly better returns (if that makes sense.)  Of course, my 1-year rung is in fact composed of securities that were purchased when they were 3-years, so the 1-year rung performs better than SHV would perform.  (Hopefully that makes sense.)

My Treasury ladder is still pretty young (not even two years old) so I haven't got a lot of data yet to make a comparison.  I'll be upset if SHY is making better Treasury Note "picks" to the point that they erase my theoretical .15% advantage.  :)
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Re: Short Term Treasury Ladder Strategies

Post by moda0306 » Mon May 23, 2011 9:52 am

I wonder what the "drawdowns" of 5-year treasuries looked like in the 1970's?  The 1-3 year ladder seemed to do fine per Craig's PP historical returns.

I guess I feel like "cash" is a vague term (maybe not to HB, but to me in how I apply it to my PP) that ranges from ultra liquid cash in a checking account, and even some hard cash in a safe, all the way to my 5-year Ally CD, i-bonds, and what may someday be some kind of ladder system.

It's surprising to see that LTT's only lost 4% at worst (calendar year) in the 1970's.  That's really something else, and tends to make me a lot less scared about 3 or even 5 year treasuries as my "deep cash."  Personally, though, at 1% return for 3-year treasuries, I almost feel like "voting with my feet" (if it weren't for i-bonds and my Ally CD) and holding my cash under the mattress.  This is more out of principal than out of fear of needing that much cash on hand.  I just feel like a lemming loaning cash to someone at less than 1% interest, only to have the fed buy that loan, allowing the bank to let people like me borrow for a mortgage at 5%.

I feel like these .2% interest st bonds are for millionaires that 1) can't afford the risk of actually physically holding that much cash, and 2) are focused solely and completely on nominal wealth preservation, as long as it doesn't lose too much to inflation.
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Re: Short Term Treasury Ladder Strategies

Post by Lone Wolf » Tue May 24, 2011 9:18 am

Nice returns!  I want to come back to this more later, but it's notable that "rate tarting" in the United States data usually (although not absolutely always) means going further out on the yield curve.  This implies that the traditional, more robotic ladder that I do will likely have similar but slightly lower overall results (but of course with somewhat less interest rate risk in a rebalance.)

I'll run the numbers on this a bit later when I've got more time.  I'm personally most comfortable keeping my ladder "close" to me as a 0-3, but I do admit that the 5-year shows impressive performance.
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