Rebuilding My Ladder

Howard Rohleder

I DID IT AGAIN. I correctly identified a trend but jumped too soon.

When interest rates plummeted as the Federal Reserve reacted to COVID-19, I had a ladder of certificates of deposit. Some of these CDs are only now reaching maturity. Each step of the ladder yielded 2% to 3%. This looked good in comparison to the low rates available through most of the COVID period.

As the short-term CDs in the ladder matured, I deposited most of the proceeds in a high-yield savings account. Its interest rate had dropped as low as 0.5%, but I accepted that low return because I didn’t want to lock in low CD rates for the long run.

Not long ago, I wrote about using this money to partially rebuild my CD ladder. Rates were inching up and I thought a yield of just over 1% was worth locking in with a 13-month CD. After all, this was a better rate than what had been available during the past few years.

My first indication that I could do better came in a comment from a HumbleDollar reader, who asked why I would buy a CD when I could build a ladder of one- to three-year Treasurys yielding far more. An added bonus: Interest on Treasurys isn’t subject to state or local income taxes, raising their effective return.

The short answer is, I’d never before considered Treasurys as an investment option. I’d only just opened my first TreasuryDirect account a few months earlier to take advantage of Series I savings bonds, then paying an initial annualized rate of 9.62%.

The other factor: I didn’t appreciate just how fast interest rates would rise this year—or that the rates paid on Treasurys would rise considerably faster than bank CD rates. Banks are still not hungry for CD money, apparently.

After my false start with low-rate CDs, I started to rebuild my ladder for a second time. A ladder usually has two advantages: You get higher rates for investing in longer maturities and you get cash flow from the shorter-term investments as they mature.

To rebuild my ladder, I learned how to submit a purchase for a future auction on TreasuryDirect. The website is a little clunky, but—after a couple of transactions—I began to learn my way around. There are no transaction fees.

 I’ve made six purchases at auction so far, and two more are pending. I’ve already had one 13-week Treasury bill mature. When I bought it, the payment for the T-bill was electronically debited from my high-yield savings account after the auction. When the T-bill subsequently matured, the proceeds were electronically deposited back into the same account. There was no need for human interaction.

As interest rates rose, I was still stuck with two recently purchased CDs yielding around 1%. An online calculator showed me that, even after subtracting the early withdrawal penalty, cashing in the CDs made sense. I bit the bullet and redeemed the CDs to buy a new CD yielding 3.5%.

At the moment, short-term CDs have better yields than longer ones. Before COVID, I was buying four-year CDs for each step on my ladder. Now, my ladder is primarily made up of investments maturing in less than a year, and some as short as three months. I did reach out to bid for one two-year Treasury note. That’ll probably turn out to be another mistake. Live and learn.

At some point, long-term rates will once again exceed short-term rates by a meaningful amount. When that happens, I’ll lengthen the maturities of my Treasurys and CDs as my current T-bills mature.

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