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Author: Sonnet Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 19380  
Subject: Building a Treasury Ladder Date: 8/21/2004 3:07 PM
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I am seriously considering building a Treasury ladder, I read this from TMF Pixy from about 4 years ago http://www.fool.com/retirement/retireeport/2000/retireeport000724.htm

My question is if I want to make a 10 year ladder does it really matter if I have 10 bonds maturing every year or 5 bonds maturing every 2 years?

By the way anyone know how Pixy is doing?
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Author: Goofyhoofy Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9346 of 19380
Subject: Re: Building a Treasury Ladder Date: 8/21/2004 4:02 PM
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My question is if I want to make a 10 year ladder does it really matter if I have 10 bonds maturing every year or 5 bonds maturing every 2 years?

No, it doesn't really matter, the object is to have your "ladder" flexible so that you can take advantage of any opportunities which arise across the 10-year span, while taking advantage of some better rates for the longer term bonds (or CD's or whatever) that are available.

That said, it could matter. If you had just rolled over one rung and six months later there was a sudden spike in rates (either way), with the annual scenario you'd be just 6 months away from being able to take advantage of it (or killed by it), whereas with the 2 year rungs you'd be 18 months away, by which time it might have completely evaporated.

But there is no way to know in advance which is best, and if rates move one way or the other that can affect your strategy, and so on.

Frankly, I would take a look at the amount of money you're dealing with and let that help guide you. I'd want to have enough money to do something as each rung matured. What that means, exactly, I don't know; everybody's needs will be different. But if it was a mere $10,000, that might not be enough to upgrade your housing - or buy that stock you've discovered - or exercise options which the company has given you - or buy a new car - or whatever.

Maybe $20,000 would be enough. Or maybe it would take even more. So as I say, rather than deal with some piddling amount each year, I'd tend to group it into chunks that were meaningful enough to care about when the time was due: less maintenance, and a better ability to do something with it when you got it. (Assuming you don't just roll it over each time, which is perfectly valid, but if that's all you're ever going to do, why not just go longer and get the higher rate in the first place?)

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Author: thomasr0 One star, 50 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9347 of 19380
Subject: Re: Building a Treasury Ladder Date: 8/21/2004 4:15 PM
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Sonnet,

It seems like you would have an annual opportunity to get access to a portion of your bond assets at maturity with 10 1-year rungs in the bond ladder; whereas you would only have bi-annual @matuiry access to the funds with two-year rungs.

I established a 4-year municiple bond ladder to fund my son's college with annual maturities. However, one year into college my son has decided the academic life is not for him. Now I am looking a rebuilding the ladder with an eventual 10-year length. Pixy's article indicated that we can't predict interest rate changes; but I believe we are in for a long stretch of interest rate increases. I am wondering if in this interest rate-raising environment it would be better for me to rebuild the ladder with short-term (1 or 2 years) rungs. At least until it looks like the Fed is likely done with raising interest rates.

Your thoughts?

Tom

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Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9348 of 19380
Subject: Re: Building a Treasury Ladder Date: 8/21/2004 7:03 PM
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The fed controls short term rates -- generally this influences longer term rates -- but keep in mind not always. An example is an inverted yield curve. i.e. when it costs more to borrow money for 2 years then 10 years.

Just this year we have seen some rates rising, but mortgage rate dropping at in the last 4 months.

I guess what I am trying to say is this -- yes all the signs say we are going to have rising rates. But predicting when, how much and the shape of the curve is not simple. It is was people would invest in bonds instead of those darn risky stocks.

Gordon
Atlanta

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Author: Sonnet Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9349 of 19380
Subject: Re: Building a Treasury Ladder Date: 8/22/2004 1:37 AM
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I am wondering if in this interest rate-raising environment it would be better for me to rebuild the ladder with short-term (1 or 2 years) rungs. At least until it looks like the Fed is likely done with raising interest rates.

I think this is the reason for building a ladder in the first place. We just don't know when or how much rates will rise and we don't want to lose income in the mean time.

As to the first reply no it's not 10 or 20 k more like 500k so if I did build it with 10 yearly maturities it would be 50k each, if I did it with 5 it would be 100k each. Guess it really doesnt make that much difference other then as was stated less maintinance with 5. As far as diversification goes there is no risk of default so that is not an issue.


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Author: Sonnet Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9350 of 19380
Subject: Re: Building a Treasury Ladder Date: 8/22/2004 3:11 AM
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(Assuming you don't just roll it over each time, which is perfectly valid, but if that's all you're ever going to do, why not just go longer and get the higher rate in the first place?)

I'm not sure what you mean by "go longer" since we are talking about 10 year bonds but if you mean invest the whole amount in one pop maturing in ten years that would be defeating the purpose of the ladder in the first place. The ladder is to not have everything tied up in one point of time in that 10 year span and risk being at a low point in the interest rate cycle with all your funds.

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Author: Sonnet Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9351 of 19380
Subject: Re: Building a Treasury Ladder Date: 8/22/2004 3:14 AM
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PS: Pixie, just saw your post as of 7/5/04 glad your still with us and cancer free I hope. Best wishes...

Sonnet

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9352 of 19380
Subject: Re: Building a Treasury Ladder Date: 8/22/2004 10:53 AM
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Sonnet writes:

Pixie, just saw your post as of 7/5/04 glad your still with us and cancer free I hope. Best wishes...

Thanks for your kind remarks. Yep, I'm still here despite a second and totally different cancer. The first has been absent since August 2000 and the second since February 2002. The latter was the sneakiest and the hardest to eradicate. However, I'm too cantankerous and stubborn to get rid of easily, so I expect to be around for many more years.

Regards...Pixy


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Author: ResNullius Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9353 of 19380
Subject: Re: Building a Treasury Ladder Date: 8/22/2004 6:20 PM
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Thanks for your kind remarks. Yep, I'm still here despite a second and totally different cancer. The first has been absent since August 2000 and the second since February 2002. The latter was the sneakiest and the hardest to eradicate. However, I'm too cantankerous and stubborn to get rid of easily, so I expect to be around for many more years.

Best of everything to you.


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Author: jtmitch Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9356 of 19380
Subject: Re: Building a Treasury Ladder Date: 8/25/2004 9:00 AM
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This may not be such a great idea in today's low interest rate environment, but let me throw one other idea in here:

Use I-Bonds for some of the rungs on your ladder. I bought a bunch of I-Bonds a few years ago when the base rate was 3.5% (+ the rate of inflation, adjusted semi-annually). What I like about I-Bonds is that you can hold them for 30 years if you want to or you can redeem them as soon as 5 years without penalty. What this lets you do is set a "nominal maturity date" so you can fit them in your ladder wherever you want. But you can readjust the nominal maturity date to whatever date you want (up to 30 years) if it not advantageous to redeem it on the original date you set. That gives you flexibility you wouldn't otherwise have. The other advantage (at least based on the way I am using them) is that you don't collect or pay taxes on the interest until you redeem them. (This would not be good if you wanted to use the interest for living expenses prior to redemption date.)

jtmitch

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