What duration do you use for Bond/CD ladder rungs?

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TheTimeLord
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What duration do you use for Bond/CD ladder rungs?

Post by TheTimeLord »

I have always tended towards using 1 month rungs on my ladders but at this point in my life I think that is way too much effort. It seems like 6 month and 1 year are pretty common especially when using tools. So what duration are people using for the rungs on their Bond and CD ladders 1 month, 3 months, 6 months, a year or something else?
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tonyclifton
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Re: What duration do you use for Bond/CD ladder rungs?

Post by tonyclifton »

I thought ladders were used with specific dates that the money was needed? For example, $10,000 on January 1st.

If the money is not needed on a specific date, wouldn't a bond fund (ultra short, short, intermediate, or long) give all the benefits of a ladder with only a minor expense and almost no hassle?
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Re: What duration do you use for Bond/CD ladder rungs?

Post by sailaway »

We couldn't agree, so we decided to stick with bond fund. So much more simplicity, even if this year has made it look less than ideal.
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Re: What duration do you use for Bond/CD ladder rungs?

Post by TheTimeLord »

tonyclifton wrote: Wed Jun 22, 2022 8:51 am I thought ladders were used with specific dates that the money was needed? For example, $10,000 on January 1st.

If the money is not needed on a specific date, wouldn't a bond fund (ultra short, short, intermediate, or long) give all the benefits of a ladder with only a minor expense and almost no hassle?
Whether it is rational or irrational I am not a fan of bond funds.
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Re: What duration do you use for Bond/CD ladder rungs?

Post by BrooklynInvest »

I've never heard of anything other than annual maturity (not duration) on a bond ladder but I suppose it's not too difficult to do 6 months? Monthly or even quarterly seems like a ton of work for little reward - are you getting that much difference in yield from a maturity date of Jan 1 2025 versus April 1 2025?
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Re: What duration do you use for Bond/CD ladder rungs?

Post by TheTimeLord »

BrooklynInvest wrote: Wed Jun 22, 2022 9:35 am I've never heard of anything other than annual maturity (not duration) on a bond ladder but I suppose it's not too difficult to do 6 months? Monthly or even quarterly seems like a ton of work for little reward - are you getting that much difference in yield from a maturity date of Jan 1 2025 versus April 1 2025?
The duration of the rungs seems to be a function of the duration of the ladder in many examples. That said, if I am liability matching using say 5 year TIPS I would prefer to have 3 month or 6 month rungs instead of a year because if I use a year when the TIP matures I have to figure out how to invest 11 months of expenses until I need them and that will likely be a lower return than I was getting with the TIP. But I am sure a lot of this is just personal preference.
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Re: What duration do you use for Bond/CD ladder rungs?

Post by AerialWombat »

I’m doing monthly maturities on my T-bill ladder, just like I had with a CD ladder before it. I did a jumble of bill lengths to initially fill it out, but am replacing shorter stuff with 26-week bills as they mature.

I’m only two months in so far, but enjoying the manual process. It satisfies the psychological urge to tinker.
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Re: What duration do you use for Bond/CD ladder rungs?

Post by sport »

With a more "normal" yield curve, I would have a ladder of 5-year or 6-year CDs. Since there is little yield increase for longer terms currently, I have been using 2-year CDs. This causes my CD maturity dates to come closer together than I really want.
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Re: What duration do you use for Bond/CD ladder rungs?

Post by tonyclifton »

TheTimeLord wrote: Wed Jun 22, 2022 9:45 am
BrooklynInvest wrote: Wed Jun 22, 2022 9:35 am I've never heard of anything other than annual maturity (not duration) on a bond ladder but I suppose it's not too difficult to do 6 months? Monthly or even quarterly seems like a ton of work for little reward - are you getting that much difference in yield from a maturity date of Jan 1 2025 versus April 1 2025?
The duration of the rungs seems to be a function of the duration of the ladder in many examples. That said, if I am liability matching using say 5 year TIPS I would prefer to have 3 month or 6 month rungs instead of a year because if I use a year when the TIP matures I have to figure out how to invest 11 months of expenses until I need them and that will likely be a lower return than I was getting with the TIP. But I am sure a lot of this is just personal preference.
You could buy the 5 year TIPS from your broker and sell on the secondary market on any date to give you the exact rung you seek. The secondary market should price the TIP accurately.
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Re: What duration do you use for Bond/CD ladder rungs?

Post by TheTimeLord »

tonyclifton wrote: Wed Jun 22, 2022 10:34 am
TheTimeLord wrote: Wed Jun 22, 2022 9:45 am
BrooklynInvest wrote: Wed Jun 22, 2022 9:35 am I've never heard of anything other than annual maturity (not duration) on a bond ladder but I suppose it's not too difficult to do 6 months? Monthly or even quarterly seems like a ton of work for little reward - are you getting that much difference in yield from a maturity date of Jan 1 2025 versus April 1 2025?
The duration of the rungs seems to be a function of the duration of the ladder in many examples. That said, if I am liability matching using say 5 year TIPS I would prefer to have 3 month or 6 month rungs instead of a year because if I use a year when the TIP matures I have to figure out how to invest 11 months of expenses until I need them and that will likely be a lower return than I was getting with the TIP. But I am sure a lot of this is just personal preference.
You could buy the 5 year TIPS from your broker and sell on the secondary market on any date to give you the exact rung you seek. The secondary market should price the TIP accurately.
So are you saying I could fill out my 4th year of expenses by purchasing 5 year TIPS then selling them on the secondary market before maturity with the only risk being a possible yield differential?
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Re: What duration do you use for Bond/CD ladder rungs?

Post by Svensk Anga »

TheTimeLord wrote: Wed Jun 22, 2022 9:45 am
BrooklynInvest wrote: Wed Jun 22, 2022 9:35 am I've never heard of anything other than annual maturity (not duration) on a bond ladder but I suppose it's not too difficult to do 6 months? Monthly or even quarterly seems like a ton of work for little reward - are you getting that much difference in yield from a maturity date of Jan 1 2025 versus April 1 2025?
The duration of the rungs seems to be a function of the duration of the ladder in many examples. That said, if I am liability matching using say 5 year TIPS I would prefer to have 3 month or 6 month rungs instead of a year because if I use a year when the TIP matures I have to figure out how to invest 11 months of expenses until I need them and that will likely be a lower return than I was getting with the TIP. But I am sure a lot of this is just personal preference.
With 5 year TIPS, you get only two issues per year, so six month intervals at the shortest. (There are more auctions than that, but only two maturity dates per year. The other auctions are reopenings. This Thursday’s 5 year auction is a reopening and will mature in 4 years and 10 months.)

If you want more rungs, you will have to go to secondary market to get 10 year bonds maturing in January or July to fill in between 5 year TiPS in April and October. One or two bonds maturing per year is good enough for me.
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Re: What duration do you use for Bond/CD ladder rungs?

Post by Doc »

TheTimeLord wrote: Wed Jun 22, 2022 8:40 am ... at this point in my life I think that is way too much effort.

Agreed. I use 6 month rungs for Notes and 13 week rungs for Bills (aka "cash")
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Re: What duration do you use for Bond/CD ladder rungs?

Post by tonyclifton »

TheTimeLord wrote: Wed Jun 22, 2022 10:38 am So are you saying I could fill out my 4th year of expenses by purchasing 5 year TIPS then selling them on the secondary market before maturity with the only risk being a possible yield differential?
Not quite...I think there are more risks. For example, interest rate risks. For example, if rates go way up and your 5-year TIP has a lower rate the secondary market would probably pay you less for taking it off your hands.

You can check the secondary market right now at your broker. Check out the offers.
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Re: What duration do you use for Bond/CD ladder rungs?

Post by TheTimeLord »

Svensk Anga wrote: Wed Jun 22, 2022 10:47 am
TheTimeLord wrote: Wed Jun 22, 2022 9:45 am
BrooklynInvest wrote: Wed Jun 22, 2022 9:35 am I've never heard of anything other than annual maturity (not duration) on a bond ladder but I suppose it's not too difficult to do 6 months? Monthly or even quarterly seems like a ton of work for little reward - are you getting that much difference in yield from a maturity date of Jan 1 2025 versus April 1 2025?
The duration of the rungs seems to be a function of the duration of the ladder in many examples. That said, if I am liability matching using say 5 year TIPS I would prefer to have 3 month or 6 month rungs instead of a year because if I use a year when the TIP matures I have to figure out how to invest 11 months of expenses until I need them and that will likely be a lower return than I was getting with the TIP. But I am sure a lot of this is just personal preference.
With 5 year TIPS, you get only two issues per year, so six month intervals at the shortest. (There are more auctions than that, but only two maturity dates per year. The other auctions are reopenings. This Thursday’s 5 year auction is a reopening and will mature in 4 years and 10 months.)

If you want more rungs, you will have to go to secondary market to get 10 year bonds maturing in January or July to fill in between 5 year TiPS in April and October. One or two bonds maturing per year is good enough for me.
True, I wasn't thinking when I constructed the example. I was just trying to illustrate a reason not to use a 1 year rung.
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Re: What duration do you use for Bond/CD ladder rungs?

Post by Leif »

Monthly does seem a lot of work to maintain a ladder.

My CD ladder varies a bit depending on when money became available at the time I set them up. But in general my CDs are maturing yearly. Currently maturing CDs are 5 year CDs. Now I'm buying 1-2 year CDs/T-Bills.

I keep about 1-2 years of expense not covered by income in cash. So I replenish my cash yearly and if I have extra I put it in a new CD/T-Bill.
Last edited by Leif on Wed Jun 22, 2022 11:14 am, edited 1 time in total.
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Re: What duration do you use for Bond/CD ladder rungs?

Post by BBHead »

I generally lay out my Bond/CD ladder by quarter. I agree with others that monthly becomes a lot of work to manage. At the same time, with the volatility in interest rates over the last 6 months, I've seen the value of maintaining some additional granularity vs. an annual schedule. It has provided some flexibility, for example, to allow me to take advantage of Treasuries, which currently exceed CD rates for equivalent duration. Of course, that could change.
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Re: What duration do you use for Bond/CD ladder rungs?

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TheTimeLord wrote: Wed Jun 22, 2022 8:40 am I have always tended towards using 1 month rungs on my ladders but at this point in my life I think that is way too much effort. It seems like 6 month and 1 year are pretty common especially when using tools. So what duration are people using for the rungs on their Bond and CD ladders 1 month, 3 months, 6 months, a year or something else?
With a normal yield curve I have historically had 3 month rungs. However, over the last few years my 5 year ladder has gotten compressed to more like a 2-21/2 year with rungs much closer. I am now in the process of increasing the maturity dates and trying to get back to a 5 years with 3 month rungs. Going to take a little time.
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Re: What duration do you use for Bond/CD ladder rungs?

Post by Richard1580 »

AerialWombat wrote: Wed Jun 22, 2022 10:21 am I’m doing monthly maturities on my T-bill ladder, just like I had with a CD ladder before it. I did a jumble of bill lengths to initially fill it out, but am replacing shorter stuff with 26-week bills as they mature.

I’m only two months in so far, but enjoying the manual process. It satisfies the psychological urge to tinker.
I started doing something very similar a couple of months ago. Dumped my intermediate bond fund (BND), banked the loss and I am purchasing 1 year T-bills each month at auction through Vanguard. Currently, I have a bunch of 3 and 6 month Treasuries which I use to purchase the 1 year bills as they mature. Eventually, I will probably move the money back into BND, but I don't see that happening anytime soon.

There really is not that much work to purchasing a 1 year T-bill each month. I just have a recurring reminder on my calendar. It takes about a minute to log onto Vanguard and make the purchase.
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Re: What duration do you use for Bond/CD ladder rungs?

Post by rockstar »

My grandma back in the 80s during her retirement did CDs in one year increments. I think, she did 5 years at a time. Of course, when rates went double digits, I think, she maxed out at 10 years, where she spread her money across ten buckets. Each year a CD would mature, and she would use some of the money and roll over the rest. She had both a pension and social security.
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Re: What duration do you use for Bond/CD ladder rungs?

Post by AerialWombat »

Richard1580 wrote: Wed Jun 22, 2022 4:42 pm
AerialWombat wrote: Wed Jun 22, 2022 10:21 am I’m doing monthly maturities on my T-bill ladder, just like I had with a CD ladder before it. I did a jumble of bill lengths to initially fill it out, but am replacing shorter stuff with 26-week bills as they mature.

I’m only two months in so far, but enjoying the manual process. It satisfies the psychological urge to tinker.
I started doing something very similar a couple of months ago. Dumped my intermediate bond fund (BND), banked the loss and I am purchasing 1 year T-bills each month at auction through Vanguard. Currently, I have a bunch of 3 and 6 month Treasuries which I use to purchase the 1 year bills as they mature. Eventually, I will probably move the money back into BND, but I don't see that happening anytime soon.

There really is not that much work to purchasing a 1 year T-bill each month. I just have a recurring reminder on my calendar. It takes about a minute to log onto Vanguard and make the purchase.
Yes, it's pretty straightforward. Right now, I'm trying to decide if I want to start adding 5-year TIPS to the mix, or just stick with rolling T-bills and my core, long-term bond holdings, which are corporate bonds inside 401k and muni index fund in taxable. After some reading today, I'm thinking I'll stick with nominal T-bills and avoid the tax complexities inherent with TIPS.
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Re: What duration do you use for Bond/CD ladder rungs?

Post by Artsdoctor »

TheTimeLord wrote: Wed Jun 22, 2022 8:40 am I have always tended towards using 1 month rungs on my ladders but at this point in my life I think that is way too much effort. It seems like 6 month and 1 year are pretty common especially when using tools. So what duration are people using for the rungs on their Bond and CD ladders 1 month, 3 months, 6 months, a year or something else?
Great question. I've tried several variations over the years. A long time ago when the yield curve was upsloping, I could easily by a 5-year ladder with CDs maturing every year. It wasn't difficult to set up but I had to ask myself what exactly the purpose of doing so was at the time (I was not retired). Now, the yield curve is very different and you don't get paid much for going longer than 2 years; I don't think you'd want to in this environment.

For now, I've settled on 6-month T-bills maturing every 3 months (January purchase maturing in July, and April purchase maturing in October). I can add and subtract when things mature.

It hasn't really my investment portfolio for the most part. I still use intermediate-term muni funds for long-term investments but for money I'll need in the next few years, I'll alternate between the T-bills.
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Re: What duration do you use for Bond/CD ladder rungs?

Post by Parkinglotracer »

6 months, 1 yr, 2 yr, and 3 yr for me to limit my interest rate risk.
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