Short Term Treasury Ladder Strategies

[Lone Wolf]

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.

[Gumby]

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.

[Gumby]

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:



...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?

[Lone Wolf]

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.

...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.

[Gumby]

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.

[Lone Wolf]

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.)

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.

[rickb]

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.

[Lone Wolf]

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.

[Lone Wolf]

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. 

[moda0306]

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.

[Lone Wolf]

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.