What Are Treasury Bill (T-Bill) Ladders?
T-bill laddering is a cash management strategy that involves purchasing T-bills or treasury bills at regular cadences to create a series of staggered maturities and a steady stream of returns. As each T-bill matures, the proceeds are reinvested into new T-bills with a prescribed maturity, continuing the ladder.
How to Ladder T-Bills
A ladder can be set up in just a few steps:
Define Investment Amount and Objectives
Before setting up a T-bill ladder, determine the total investment amount and outline financial goals, such as ensuring regular liquidity or maximizing returns over a certain period.
Choose T-Bill Maturities
Select the appropriate maturities for the ladder, considering factors like the desired cash flow frequency and exposure to different interest rates.
Make Initial Investments
Invest in the chosen T-bills, ensuring the investments are spread across the selected maturities to establish the ladder’s structure.
Reinvest Proceeds to Maintain the Ladder
As T-bills mature, reinvest the principal and interest into new T-bills, maintaining the ladder’s structure and ensuring continuous liquidity.
Monitor and Adjust the Ladder
Regularly monitor the ladder’s performance and adjust the maturities or investment amounts as necessary based on changes in financial goals or market conditions.
Laddering T-Bills with Jiko
Jiko Pockets simplify T-bill laddering by automating both the initial investment and the ongoing reinvestment process.
Each Jiko Pocket is assigned a Treasury bill maturity. When funds are transferred into a new or existing Pocket, Jiko automatically invests those funds in Treasury bills with that Pocket’s designated maturity. When those securities mature, the proceeds are automatically reinvested into new Treasury bills of the same maturity, eliminating the need to manually place trades or manage rollovers.
To create a ladder, clients can time transfers into one or more Pockets based on their desired maturity schedule.
Example 1: A Simple Weekly Liquidity Ladder
Let's say a Treasurer has $12M in excess cash to invest and decides to create a straightforward ladder that provides liquidity every week, using a single maturity, the 4-week T-bill.
The team could create a Jiko Pocket that invests in the 4-week Treasury bill and deposits $3 million into that Pocket each Monday for four consecutive weeks:
Week 1: Deposit $3 million into the Pocket
Week 2: Deposit $3 million into the same Pocket
Week 3: Deposit $3 million into the same Pocket
Week 4: Deposit $3 million into the same Pocket
Because each deposit is invested when received, the four investments mature on a staggered schedule. Beginning in Week 5, one of the four investments reaches maturity every week. The proceeds from each maturity are automatically reinvested into a new 4-week Treasury bill, maintaining the ladder without requiring manual intervention.
Example 2: A Multi-Maturity T-Bill Ladder Example
Treasury teams may also choose to build a ladder using multiple Treasury bill maturities to spread investments across different points on the yield curve.
Using the same $12 million example, a treasurer could divide funds across several maturities:
$3 million invested in the 4-week Treasury bill
$3 million invested in the 8-week Treasury bill
$3 million invested in the 13-week Treasury bill
$3 million invested in the 26-week Treasury bill
With Jiko, this can be accomplished by adjusting the investment strategy of a Pocket before each funding. For example, a client might fund a Pocket with $3 million while targeting the 4-week Treasury bill, then change the Pocket's investment strategy to the 13-week Treasury bill before making the next $3 million deposit.
Each deposit is invested according to the strategy selected at the time of funding, and as individual positions mature. This allows treasury teams to build and maintain a customized ladder across multiple maturities without manually trading or managing rollover schedules.