How To Structure Tbill Ladder To Balance Returns & Liquidity

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Arc Team


If you’re reading this guide, we’re going to assume that you’re already well down the rabbit hole of T-bill ladders. You probably have a basic understanding of what they are and how they work, if that’s not the case, get up to speed in ~2mins with this guide on treasury bill ladders. You’re probably wondering how to structure your first ladder, and how to allocate your cash across the various rungs to balance your returns with your liquidity needs. If that’s the case, you’re in the right place—let’s jump in!

Consideration: T-bill ladder or indirect investment via ETF

Before we jump into the logistics behind configuring a T-bill ladder, we wanted to share a few words on T-Bill ETFs. TBill ETFs are run by fund managers who configure an underlying set of T-bill ladders that track the performance of the related government securities. For the majority of startups, T-bill ETFs are a better fit. Why?

You don’t have to deal with any of the logistics of buying, selling, or managing the T-bill ladder. Your invested capital will be much more liquid, and you don’t have to do anything to generate the returns — simply buy, hold, and reinvest the proceeds each month.

Yes, you will earn lower returns than if you would’ve purchased the T-bills directly, and yes you will have to pay a management fee, but the time–savings and peace of mind that T-bill ETFs provide are well worth the opportunity cost.

Housework to complete before structuring your first t-bill ladder 

So you’ve decided to take the road less traveled and structure your own T-bill ladder, first-off, kudos to you! Before you buy the underlying securities, there is a bit of housework you’ll want to complete. 

  • Step 1: Forecasting - Based on your trailing three-month spend and any planned spend for the following two months, forecast your cash needs. Add 10% as a buffer and set that aside in your primary account. 
  • Step 2: Investable Amount - From your forecasts and the remaining cash that you don’t foresee needing in the short term, determine how much you’re willing to invest. Typically there really isn’t much upside of investing in T-bills over a high-yield savings account unless you have a million dollars or so to invest.
  • Step 3: Time Horizon - Depending on how long you won’t need to access the funds, you may choose to purchase T-bills with maturities of 1, 3, 6, 9, 12 months, or longer. 
  • Step 4: Spacing - Extend your forecasting plans out to one year to determine your cash needs for the next 3, 6, and 9 months, remember to add a buffer of at least 10%. Then match up the T-bill maturities to these milestones to determine how much capital you can afford to lock up.

Homework complete—check! Now let’s look at the mechanics behind how T-bill maturity dates impact the related returns and liquidity, and how rate hikes impact the par value of t-bills.

T-bill maturity: how the time horizon affects the returns, and liquidity 

In general, the longer the time horizon, the greater the risk of an investment, and thus the greater the return it provides—Tbills operate in a similar manner.

T-bills that have maturity dates further in the future, typically come with higher coupon rates. Also t-bills that have maturity dates further in the future typically are more liquid, as there is more demand for them, however this is not always the case. In some instances, Tbills with shorter maturities generate higher returns and have more demand. This typically occurs when there is an economic contraction and investors are nervous about the future, it is referred to as an “inverted yield curve”.

The impact of rate hikes on the par value of the T-bills

Over the past twelve months, the Federal Reserve has raised interest rates eight times. With each consecutive rate hike the coupon that new (and existing) t-bills paid, increased. In turn, this decreased the related par value of the underlying securities. This is important to note, because loads of startups and banks purchased T-bills during this time, and if they sold them prior to maturity, like SVB was forced to do, they would lose some percentage of their principal.

That’s why its critically important to understand what your cash needs are prior to building a T-bill ladder, because the last thing you want to do is liquidate your ladder for a loss simply because you improperly calculated how much working capital you needed.

Check out this guide for a more in depth look at how monetary policy, the economic environment and interest rates impact bond yields.

It’s time to structure your first t-bill ladder 

Now that you have a better understanding of the more advanced mechanics behind T-bills, and you’ve determined how much capital you have to invest, your time horizon and your ideal spacing, it’s time to set up your first T-bill ladder.

Approach a bank, financial institution, or another online broker that offers t-bills. Explain what your goals are, how much capital you have…etc. they’ll set you up with an online portal to purchase the securities. Simply transfer your funds in and elect or decline the automatic reinvestment option—that’s it!

7 key tips for maximizing your first t-bill ladder

  • Frequently Re-Forecast - Revisit your forecasts every few weeks or whenever a major event occurs to ensure your assumptions are still correct. 
  • Forecast w/ Buffer - Related to the above, when forecasting remember to add a buffer of at least 10% to avoid cash crunches.
  • Mark your Calendar - Now that some of your cash is parked in semi-illiquid assets it cannot be directly used to pay bills. Mark your calendar to pull the needed working capital each month prior to it being reinvested. 
  • Return Variability - The return of the same-dated T-bill may vary from bank to bank or broker to broker, so it’s important to shop around to find the best rate.
  • Allocation - For most startups, air on the side of caution: park <50% of your cash in T-bills that mature in 6+ months, and more than 50% of your cash in T-bills that mature in under 6 months.
  • Consider ETFs over T-bill Ladders - We’ve made the case once, and we’ll make it again— the time–savings and peace of mind that T-bill ETFs provide are well worth the opportunity cost of the minimal upside.
  • Consider Treasury Management - Rather than managing the Tbill ladder on your own, consider leveraging a treasury management platform that automates the cash sweeping and investment process.

Final thoughts on structuring T-bill ladders to balance returns and liquidity

Whether you’re setting up your first, second, or hundredth T-bill ladder the most important thing to do is balance the upside, or returns, with your working capital (liquidity) needs. If you’re looking for a partner to help walk you through the entire process and purchase/structure the t-bills on your behalf, check out Arc Gold. It helps startups put their treasury management on autopilot, comes with up to $2.75M FDIC insurance, $500k of SIPC coverage, and pays out 5.44% APY.

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