Rebuilding My Ladder
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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