Laddering bonds or CDs

From Bogleheads

Laddering is a technique of holding bonds or CDs of different maturity dates in a portfolio in order to balance high yield and liquidity.

Asset class considerations

The credit instruments used for a ladder should have the following characteristics:

  • The bonds should not be subject to credit risk.

A ladder of individual bonds generally includes between 10 and a couple dozen bonds. That means that each bond represents 2.5% to 10% of a portfolio.

The argument against an investor ever owning individual corporate, high yield, or emerging market bonds (even in a ladder) is that the effect of a single default (such as a corporation or city brought down by fraud), even if unlikely, could be devastating to the investor's portfolio. For municipal bonds the picture is less clear, as default rates are quite low for investment grade securities;[1] nevertheless for small-to-medium-sized portfolios (Swedroe suggests $500k minimum portfolio size whereas Alan Roth suggests $50m for holding individual bonds) diversification requirements and high bid/ask spread transaction costs suggest that most investors would be best served by holding municipal bonds in low cost diversified mutual funds.

The most frequently recommended bond instruments for bond ladders are Treasury bonds (including TIPS). needs citation As all Treasury bonds are explicitly backed by the US government, they have the highest possible credit rating. Most Treasuries also are not subject to call risk, and if purchased at auction, have no transaction costs. FDIC-backed certificates of deposit (CDs) are also appropriate instruments for a ladder.

Types of ladders

Non-rolling ladder

A non-rolling ladder is a bond ladder in which bonds are not rolled over to new bonds at the prevailing rate.

Rolling ladder

In a rolling ladder, as bonds mature they are replaced with bonds of similar maturity, so that the duration of the ladder remains approximately constant. This type of ladder is essentially equivalent to a bond fund, with the added advantage that it can be converted to a non-rolling ladder at no cost by simply failing to roll over bonds as they mature.[note 1]

Treasury bond ladders

Treasury bond ladders have the following advantages:

  1. An investor saves the mutual fund fees;
  2. If bought at auction there are no bid-offer spreads;
  3. For taxable accounts there is the ability to tax loss harvest at the individual security level; treasury interest is state tax exempt;
  4. You can target the specific maturity and cash flow you want/need. [2]

How to establish a bond ladder

Lets say that you have $100,000 to invest and want to set up a 5 year bond ladder. To start you would invest $20,000 in each of 5 bonds ranging from 1 to 5 years in maturity. The 5 bonds would each represent 1 “rung” in the ladder. At the end of the first year after setting up the ladder, and for each of the four years after that, one bond would mature giving you back the principal that you invested in the bond.

If you would like to keep the ladder going, then at the end of each year, you would reinvest the principal you receive back from the bond that matures into a new 5 year bond.

Buying treasuries at auction

The auction dates are published in the Tentative Auction Schedule of U.S. Treasury Securities.[3] A few days before the auction date, the Treasury Department also publishes a formal announcement. The announcement includes details of the security being offered. If it's a new issue, both the price and the coupon interest rate will be determined by the auction. The coupon rate is set to nearest 0.125% below the high yield from the auction. If it's a re-opening, the coupon interest rate is already known. The auction will set the yield which in turn determines the price.

After the announcement date but before the auction cutoff time, retail investors can place auction orders through TreasuryDirect or through a brokerage account. TreasuryDirect charges no fee but it only handles taxable accounts. If you want to buy in an IRA, you must use a brokerage account, which can also handle taxable accounts. As of September 2008, Fidelity and Schwab charge no fee for Treasury auction orders placed online. Vanguard Brokerage Services charges $10 for online orders unless you are a Voyager client or above (having more than $100,000 invested with Vanguard).

After the auction, the Treasury Department makes another announcement for the auction result. The settlement date is at least one day after the auction date. You must have enough cash available on the settlement date to pay for the bonds. [4]

Treasury Securities and Auction Frequency[5]
Treasury Security   Auction Frequency
52-week treasury bill 52-week bills are normally auctioned on Tuesdays every four weeks.
Two year note auctioned on a monthly basis
Three year note auctioned on a monthly basis
Five year note auctioned on a monthly basis
Seven year note auctioned on a monthly basis
Ten year note 10-year notes are auctioned at the quarterly refunding in February, May, August, and November.

10-year notes are also auctioned as reopenings in January, March, April, June, July, September, October, and December.
The reopened security has the same maturity date, coupon interest rate, and interest payment dates as the original security, but has a different issue date and usually a different price.

This online spreadsheet can help you estimate the dollars needed for buying one inflation indexed bond at auction.

TIPS Securities and Auction Frequency[6]
Treasury Security Auction Frequency
Five year TIPs are auctioned in April, and reopened in October.
Ten year TIPs are auctioned in January and July, and reopened in March, May (beginning in 2011), September, and November.
Thirty year TIPs are auctioned in February, and reopened in August.

Buying treasuries on the secondary market

You can also buy Treasuries at any time on the secondary market through a brokerage account. The prices from the brokers include a markup over what institutions pay for larger trades. Some brokers also charge a separate commission on top of the markup. TreasuryDirect does not handle secondary market purchases although you can sell your existing holdings on the secondary market through its SellDirect service (fees and restrictions apply).

The following links show some current Treasury notes pricing and yields available in the secondary market.

The following links show some current TIPS pricing and real yields available in the secondary market.

CD ladders

With a normal yield curve, long-dated CDs have a higher yield than shorter-dated ones. However, long-dated CDs, by definition, lock your money into an illiquid holding. A ladder provides a way to take advantage of the highest-yielding CDs while improving liquidity of (access to) your money.

Typically, you create a ladder by splitting your money into 5 parts, and purchasing CDs of 1, 2, 3, 4, and 5 year duration. When the 1 year CD matures, you use the money to purchase a new 5 year CD. After 4 years, you have all of your money invested in 5 year CDs, but 1/5th of your money is available every year. As each CD matures, you can decide whether to reinvest it in all or in part. This is a rolling ladder as defined above.[note 1]

If you want quicker access to your money, you can also set up a 1-year ladder, with rungs at 3, 6, 9, and 12 months.

Each time a CD matures, you can purchase the highest yielding new CD you can find (known as "riding the yield curve"). In a normal yield curve, that will be the longest dated one. But in an inverted yield curve, the shortest term CD may have a higher rate. You can even chase yields by moving your money to whatever bank is offering the best rate at that moment.

CD ladder alternatives

When interest rates are low, the penalties imposed for redeeming CDs early ("breaking a CD") are also low. A point may be reached where the return of a CD redeemed early is better than purchasing one for the equivalent maturity date.[7]

For example: A 3.49 % 7-year CD with a 12 month interest penalty is redeemed after 3 years. The return (with penalty) is 2.31%. A 3 year CD is offered at 2.00%. Breaking a 7-year CD after 3 years instead of purchasing a 3-year CD results in a higher return by 0.31%.

In this case, it may be more advantageous to purchase multiple CDs at the longest term (highest rate) and break them early. A spreadsheet can be used to evaluate if ladders, multiple CDs (non-ladder), or other scenarios are best.

Laddering versus investing in a bond fund

Please see Individual bonds vs a bond fund for a discussion of holding a ladder of bonds vs. a bond funds.


  1. 1.0 1.1 A graphical example of a rolling ladder can be seen at Ally's website.

See also

Comparing CDs


  1. Moody's US Municipal Bond Rating Scale
  2. Bond or bond funds: an easy choice, comment one-Larry Swedroe
  3. The schedule of Treasury securities auctions is released at the Treasury's Quarterly Refunding press conference, usually held on the first Wednesday of February, May, August, and November.
  4. Treasury Direct: Auctions In Depth
  5. TD Institutional-Treasury Bills; TD Institutional-Treasury Notes
  6. TD Institutional-Treasury Inflation Protected Securities
  7. CD Ladder Strategy - how to handle gaps, long term rates?, forum discussion

External links