Investors Turn to T-Bills and Laddering for Yield and Risk Balance
Investors are turning to Treasury bills (T-bills) and a strategy called laddering to balance yield and risk. T-bills, considered risk-free, offer competitive yields, currently around 4% or more. Douglas Robinson, a bond trader, recommends laddering fixed income portfolios to mitigate reinvestment risk.
T-bills, U.S. government debt securities with maturities of one year or less, are attractive for their low risk and low sensitivity to interest rate moves. However, reinvestment risk arises when yields are lower upon maturity. This is where laddering comes in. By dividing investments into smaller amounts with staggered maturity dates, investors can ensure a steady stream of funds and flexibility to reinvest at varying yields.
For instance, an investor might buy T-bills with maturities of 3 months, 6 months, and 1 year. As each bill matures, the investor receives the full face value, providing liquidity for reinvestment. This strategy helps minimize the impact of fluctuating yields and maintains a consistent investment approach.
T-bills, with their low risk and competitive yields, are an appealing choice for investors. By employing laddering, investors can manage reinvestment risk effectively, ensuring a decent yield and flexibility to adapt to changing market conditions.
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