Bond and CD Ladders

What a ladder is

A ladder divides a sum of money into pieces, called rungs, and holds each piece to a different maturity date across a chosen range. As each rung matures, the proceeds normally buy a new rung at the far end of the range, so the ladder rolls forward through time and its average maturity stays roughly constant even as calendar years pass.

The rungs are held to maturity by design, which makes the exit contractual rather than market-dependent: the issuer pays face value on a known date, and the holder is never forced to accept whatever price the market happens to offer that day. The usual building blocks are Treasuries, bank and brokered CDs, municipal bonds, and defined-maturity bond ETFs, which hold a dated basket of bonds and liquidate on a stated date.

A ladder is one of three basic shapes. A bullet points every maturity at a single date, matched to one known future expense. A barbell splits money between very short and very long maturities and skips the middle. A ladder spreads maturities evenly across the range instead, and the spacing between rungs sets how often cash comes free — annual rungs across five years free a fifth of the money each year, monthly Treasury bill rungs free a twelfth each month.

How the arithmetic works

The ladder's yield is approximately the money-weighted average of the yields on its individual rungs. Five equal rungs spread across one to five years earn something close to the average of those five separate yields, not the yield of the longest or shortest one alone.

Cash released in a given period equals total principal divided by the number of rungs, plus whatever coupon payments the still-outstanding rungs continue to pay. Building the ladder takes one round of purchases spread across the chosen maturities; maintaining it afterward takes only one purchase per period, to replace whichever rung just matured.

In steady state, every rung in the ladder was originally bought at the long rate prevailing on its own purchase date. A five-year annual ladder eventually holds five bonds, each bought at that year's five-year yield, and it is this staggered purchase history that smooths the result across full rate cycles rather than locking in any single day's rate.

Average duration for a ladder runs roughly half the length of its longest rung, so a one-to-five-year ladder carries far less price sensitivity than a single five-year bond holding the same total principal. The shape of the yield curve decides the trade-off: an upward-sloping curve means the long rungs lift the blended yield, while an inverted curve means the short rungs do, and stretching the ladder longer actually lowers the average.

How to build and read one

Three decisions define a ladder: the horizon, meaning how far out the longest rung is locked; the number of rungs, which sets how often cash is released; and the instrument used to fill each rung.

Treasury ladders are the cleanest version to build, since there is no credit decision to make, the interest is exempt from state and local income tax, and auction purchases carry no commission through TreasuryDirect or most brokers. CD ladders built at a single bank need each rung sized to stay within the FDIC insurance limit per depositor per ownership category; brokered CDs solve this differently by letting one account hold rungs issued by many different banks.

Municipal and agency ladders need their call schedules checked rung by rung, because a call provision hands the issuer, not the holder, the decision of when that rung's cash actually comes back. Defined-maturity ETFs approximate a single rung using hundreds of underlying bonds and a stated termination date, at the cost of an ongoing expense ratio and a final distribution whose exact size is not fixed in advance.

Auto-reinvestment instructions at TreasuryDirect or through a broker roll a maturing rung into a new one automatically, without the holder placing a new order each time. That automation is what makes a short-dated bill ladder genuinely low-maintenance rather than a recurring chore.

Where it misleads

A ladder does not remove reinvestment risk, it spreads it across time. If rates fall and stay low, every rung reprices downward as it matures and gets replaced, and the full effect only shows up after one complete cycle through all the rungs.

It does not remove price risk either — it removes the need to realize that risk, and only for as long as the money is genuinely not needed before a given rung matures. A rung sold before its maturity date sells at whatever the market offers that day, exactly like any other bond.

Credit risk applies rung by rung. Five bonds from the same issuer represent a single credit decision repeated five times, not five independent decisions, and that is not diversification regardless of how the maturities are staggered.

Callable rungs break the schedule outright: a called municipal or agency bond hands back cash on the issuer's chosen date, not the date the ladder was built around. And the common claim that a ladder cannot lose money at maturity only holds for rungs bought at or below face value — a bond or brokered CD bought at a premium in the secondary market still matures at par, which is below what was paid for it. Comparing a ladder's blended yield to the single highest point on the curve will always make the ladder look weak; the honest comparison is against concentrating the same money at one maturity.

Where you will meet it on this site

On the cash rates page, where CD rates across the full term grid supply the raw material for building a ladder. On the Treasury page, where bill, note, and bond maturities and the auction calendar define which rungs are actually available to buy.

On municipal and corporate bond pages, where holding a bond to maturity is the main way a retail buyer avoids paying the dealer spread twice — once on the way in and again on an early sale. Wherever defined-maturity bond ETFs appear, since each one is built to package a single rung inside a fund wrapper.

Next to the entry on duration, which explains why a ladder's overall rate sensitivity runs roughly half that of a single bond held at its longest maturity.