Questions about predefined Treasury ladders at Schwab

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investor4life
Posts: 525
Joined: Fri Oct 08, 2010 9:45 am

Questions about predefined Treasury ladders at Schwab

Post by investor4life »

Schwab allows one to build certain predefined Treasury ladders. I had a couple questions.

1. One is a 1-year ladder with 4 rungs (3/6/9/12 months). My understanding is that this means you divide the total amount into 4 equal chunks and invest them, on day 1, in four bills with maturities 3/6/9/12 months, respectively. But how do they work-in a 9-month rung in the ladder as
T-bills are issued with maturities of 4/8/13/26/52 weeks (i.e., 1/2/3/6/12 months)?

Similar question for a 2-year ladder with 4 rungs (6/12/18/24 months).

2. Does one need to turn on auto-roll to continue the ladder indefinitely? Or is it better to do this manually. (I recall reading somewhere that auto-roll can cause "insufficient funds" issues and can't be turned off w/o a call to Schwab.)

Thanks.
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Electron
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Joined: Sat Mar 10, 2007 7:46 pm

Re: Questions about predefined Treasury ladders at Schwab

Post by Electron »

When buying in the secondary market, you can select Treasury securities maturing close to any date that you choose. They can be Treasury Bills, Treasury Notes, or even Treasury Bonds.

The yield-to-maturity of each security will be related to the time remaining until maturity. As a result, it is easy to set up a one or two year ladder with any specified number of rungs.

Hopefully someone else can answer your question on the auto-roll.
Enjoying the Outdoors
Gaston
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Re: Questions about predefined Treasury ladders at Schwab

Post by Gaston »

I am not familiar with the Schwab predefined ladder. From what I have read elsewhere, however, the investor gets a better deal when purchasing treasuries at auction rather than on the secondary market.

If the above is true, then I’d want to know if Schwab is buying at auction to build your ladder. Treasury bills, I believe, have a high minimum at auction, so my guess is that Schwab is buying on the secondary market.

Maybe someone more knowledgeable can chip in?
“My opinions are just that - opinions.”
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Electron
Posts: 2656
Joined: Sat Mar 10, 2007 7:46 pm

Re: Questions about predefined Treasury ladders at Schwab

Post by Electron »

I tried a few searches and found some information. It looks like the auto-roll feature purchases securities in the Treasury auction at both Fidelity and Schwab.

That does seem like the best approach. Buying in the secondary market would require a decision after evaluating the available securities.

It may be possible to roll a maturing Treasury bill and remain fully invested. The issue date of a new Treasury bill will match the maturity date of a maturing Treasury bill. The actual purchase date would be several days earlier. It looks like the brokerage firms support the two transactions clearing on the same day.

I've read that bond ladders can start out with shorter maturities and get synchronized after the first cycle. A one year ladder with four rungs could start out with 2 three month bills, 1 six month bill, and 1 twelve month bill. After three months, one maturing three month bill would be reinvested in a twelve month bill. The second maturing three month bill would be reinvested in a six month bill. The ladder would now hold maturities of three, six, nine, and twelve months.

I would get the details from Schwab on the auto-roll process and see exactly how it works.
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