Hi,
As of October 13, the 5-year Treasury yields 5.00%, the 10-year 5.21%, and the 30-year 5.56%. The 10-year has closed at or above 5% every trading day since September 23. For anyone who needs income from their investments, that’s a rate backed by the US government that you can lock in today. So let’s be straight with you about how it works and what to watch for.
A bond ladder means buying Treasuries that mature in different years, for example 5, 7, and 10 years out. Each one pays interest every six months and returns your principal when it matures. On $500,000 split across those three at current yields, that’s roughly $25,000 to $26,000 a year in interest. Shorter maturities pay less. The 2-year is at 4.79% and the 3-year at 4.90%.
Is 5% a reason to lock in?
- A known rate, not a forecast – if you hold a Treasury to maturity, you collect the stated interest and get your principal back, whatever rates do in between
- Rates can still move – yields could go higher from here, and anyone telling you they know exactly when they’ll come down is guessing. A ladder means you don’t have to guess, because you buy in steps instead of all at once
- State tax – Treasury interest is taxed federally but exempt from state and local income tax, which matters in places like California and New York
So what is the real risk?
The yield isn’t the danger. The risk is locking in the wrong amount for the wrong timeline:
- Selling early – bond prices fall when yields rise, so a 10-year Treasury sold before maturity can come back for less than you paid. A 1 point rise in yields can mean a loss of roughly $7,000 to $8,000 on $100,000
- Reinvestment – when a short rung matures, you may have to reinvest at a lower rate, which is why a ladder holds several maturities instead of one
- Money you’ll need soon – cash you need in the next year or two belongs in cash or short-term bills, not in long bonds
Who tends to feel this most:
- Retirees and anyone drawing income from their portfolio – predictable interest means you aren’t selling stocks in a down market to cover expenses
- Anyone holding a large balance in cash or a money market – those rates reset every time the Fed moves, while a locked Treasury doesn’t
- Anyone who needs money on a known date – a ladder can be built so a rung matures right when you need it
- Portfolios that are almost all stocks – a ladder adds an income stream that doesn’t depend on the stock market
Questions about how this can work for you?
We have an in-house, fiduciary Certified Financial Planner – someone who can sit down with you, map out how much income you need and when, and tell you plainly whether a bond ladder fits.
We can build it for you wherever your money sits, at Schwab or elsewhere, with maturities from 3 months to 30 years based on when you need cash. Rates can move either way, and we see this as a window of roughly a year, so it’s worth looking at now rather than later.
Reply to this email by Monday and we’ll set up a free 15 minute session with our Certified Financial Planner. Bring your most recent investment and savings statements, and we’ll walk through how a ladder would be built for your situation, not generalities.
Sincerely,
—
George Dimov, CPA
Licensed and Insured
(833) 829-1120 toll free
(212) 994-8081 Fax
www.dimovtax.com