Maximizing Yield with a Treasury Bill Ladder in 2023

Given you’re reading this article, you’re probably evaluating T-bill ladders to maximize the yield on your idle cash—know that you’re not alone. T-bill ladders, if structured properly, can easily generate 5%+ APY on balances, but they can also quickly turn into a logistical nightmare if not managed properly. In this guide, we break down what treasury bill ladders are, how they work, how to structure them, and how they compare to other yield-bearing accounts like money market funds and high-interest savings accounts—let’s dive in!

What is a Treasury bill ladder?

A treasury bill ladder is an investment strategy that cap markets and finance teams use to generate yield on their idle cash. Essentially, they leverage a bank or broker-partner to purchase a series of Treasury bills (T-bills) with varying maturities of 1-12 months.

By leveraging T-bills with varying maturities startups can mitigate their risk while capitalizing on changing interest rates in the market. When the first round of T-bills mature, the proceeds are either rolled into new T-bills with longer maturities to take advantage of higher interest rates or they are pulled into operating accounts to satisfy short-term working capital needs.

How do t-bill ladders work?

With t-bill ladders, startups invest in T-bills with varying maturities. They purchase T-bills at a discount, and when the T-bills mature they are paid the face value. The resulting proceeds are either rolled into the purchase of more T-bills or pulled from the account to satisfy short-term working capital needs. Generally speaking, the further out the maturity date, the greater the discount rate and thus the greater the potential return.

What types of Treasury bills exist?

Technically speaking there aren’t different types of Treasury bills, rather there are Treasury bills with various maturity dates. These can range from as little as a month to 12 months. The most common are 6-month and 12-month T-bills. These T-bills are often referred to as “on-the-run” T-bills, as they are the most liquid. The 3-month and 9-month T-bills are often referred to as “off-the-run”, as they are less liquid. The least liquid are 1-month T-bills because they are nearing maturity and thus are not as attractive to investors.

Compared: Treasury bills vs Treasury notes

Treasury notes (T-notes), like Treasury bills (T-bills), are forms of debt securities issued by the U.S. Department of the Treasury. Whereas T-bills have short-term maturities (less than one year), T-notes have longer-term maturities (two, three, five, seven, and ten years). T-notes carry more risk and as such, are typically issued with higher discount (interest) rates than the shorter-term T-bills.

Why do startups leverage Treasury bill ladders?

There are a few reasons why startups leverage Treasury bill ladders.

• Effectively risk-free: Treasury bills are backed by the US Government, which has never defaulted on its debt, therefor T-bill ladders are almost risk-free.
• Generate high returns: As of Feb. 2023, Treasury bills generate some of the highest yields of any debt security.
• Compound: Upon maturity T-bills, can be rolled into the purchase of new T-bills with longer maturities, compounding gains on top of one another. 
• Liquid: T-bills are one of the most sought-after and liquid debt instruments that a startup can own. That said, premature liquidation can result in principal losses.

In addition to the above, startups primarily leverage T-bill ladders to generate immediate returns on their idle cash, while minimizing exposure to interest rate fluctuations.

What goals do startups interested in T-bill ladders have?

Generally speaking, those who are interested in T-bill ladders have two primary goals: managing interest rate risk and managing cash flow.

• Managing interest rate risk - By acquiring T-bills with varying maturity dates, startups can avoid locking themselves into a single interest rate. Normally this isn’t an issue, as interest rates remain fairly constant, however, throughout ‘22-23 rates have ticked up consistently month over month with each rate hike. Thus, people who exclusively purchased T-bills with a 12mo maturity locked themselves out of the upside in rates.
• Managing cash flow - Since T-bills pay interest when they mature, and T-bill ladders hold Treasuries with varying maturity dates, startups can secure predictable (and often monthly) income streams.

How to build a T-bill ladder?

T-bill ladders are fairly straightforward to create. The core components you’ll want to consider are the dollar amount you intend to invest, the length of time in which you intend to leave the money alone, and how much time or “space” you want between maturity dates. As a general rule of thumb, the longer the maturity date, the higher the note rate (return), and vice versa. Also, the longer the maturity, the higher the risk for interest rate fluctuation, and vice versa.

• Investable amount: Generally speaking, the upside of setting up a T-bill ladder versus keeping it in a high-yield savings account is not worth it unless you have more than $2M to invest. Also, you’ll want to make sure that the money to intend to invest is not likely to be needed in the short term. The last thing you want to have to happen is a cash crunch, which triggers a premature sale, at a loss.
• Length of time: Depending on how long of a time horizon you have for accessing the money, you may decide to invest in T-bills with maturities of 1, 3, 6, 9, 12 months, or even longer. Again, you don’t want to be in a situation where you own 12-month T-bills and at the sixth-month mark you need cash.
• Spacing: The spacing between the maturities is particularly important because it can create serious cash flow problems if you’re not careful. For example, if you lock up too much capital in long-term T-bills, and face a cash crunch you’ll sell at a painful loss. Selecting too short of maturities will result in missing out on a meaningful upside. Generally speaking, you’ll want to park approx. 50% of your cash in T-bills that have more than 6 months until maturity, 25% in T-bills that have 3-6 month maturity, and the remaining 25% in T-bills with a maturity date 1-3 months in the future.

Once you have decided how much capital you have to invest, how long you can park the capital, and how frequently you want those bills to mature, you’ll want to approach a bank, financial institution, or another online broker to purchase them. It’s important to note that the return (discount/interest rate) of a T-bill may vary from bank to bank or broker to broker, so shop around to find the best rate.

When is interest on a T-bill paid out?

Technically speaking, T-bills don’t have interest payments or interest income. Rather, they are sold at a discount from their face value and upon maturity, the face value of the bill is paid out. The difference between what the startup pays for the bill and the face value is the return, or what some call the “interest”.

Is there principal risk in a T-bill ladder?

As with all investments, there is an element of principal risk with T-bill ladders. However, the risk is limited mainly to three factors: 1) your startup experiences cash flow issues and needs liquidity for short-term capital needs, 2) rates rise and you sell, and 3) the US government defaults on its debt.

Scenario one is the most likely to happen. If you sell the T-bills before maturity, you are very likely to incur principal losses. Scenario two is the next most likely to happen, as rates have risen throughout ‘22-23, but you won’t experience principal losses unless you sell. Scenario three is the least likely to happen, as the government has never before defaulted, but it is possible.

Are T-bill ladders and brokerage accounts FDIC insured?

No, T-bill ladders and brokerage accounts are not FDIC insured. However, brokerage accounts are SIPC insured up to $500,000 if the broker becomes insolvent. Please note: SIPC insurance does not apply to principal losses incurred due to the sale of said T-bills.

Should startups buy T-bill ladders directly or invest indirectly in T-bills via ETFs?

There are two routes that startups can pursue to take advantage of T-bill ladders, they can purchase them directly through a broker and set up their own T-bill ladder, or they can purchase an ETF and let the fund manager do all the work for them.

If you set up your own ladder, you’ll generate the highest possible returns, but your capital will be locked up until maturity (note: you may be able to get out of it if you sell for a loss), and you’ll have to manage the entire program by yourself. If you purchase an ETF, you’ll generate a lower return, and you’ll pay a management fee, but you won’t have to deal with the logistics of setting up or managing the T-bill ladder, and the capital will be much more liquid (you can typically just sell the ETF).

Ultimately, the more capital you have at your disposal, the more sophisticated your capital markets team is and the more mature or stable your startup is, the more attractive internal T-bill programs are. That said, for the vast majority of the startups we talk to (Series A-C), the liquidity, peace of mind, and time–savings that ETFs provide are well worth the opportunity cost of the upside they lose out on.

What are a few of the most common providers of Treasury-based ETFs?

Hundreds of ETFs hold T-bills and other Treasuries. Some of the more common are offered by Vanguard, Dreyfus, Fidelity, Goldman Sachs, and Transamerica. The specific ETFs that have the largest AUM include $TLT, $SHY, $BIL, $SHL, $SHV, and $SGOV.

Final thoughts on Treasury bill ladders

Treasury bill (T-bill) ladders or ETFs can be a great investment for well-capitalized startups that want to maximize their idle cash. If you are considering setting up your own T-bill ladder, make sure that you’ve properly assessed how much capital you can afford to lock up, the lock-up period you are comfortable with, and the best maturity allocation for your startup to maximize your returns while minimizing your interest-rate and cashflow risks. When properly structured, T-bill ladders can generate consistent returns that quickly compound idle cash. When poorly structured, T-bill ladders can result in significant principal losses if sold before maturity. If you are considering setting up a T-bill ladder or purchasing a related ETF, check out Arc—we’ve helped hundreds of startups and we’d love to help you do the same.