Understanding Treasury ladders

A Treasury ladder is a set of individual US Treasuries that mature one after another, so a portion of your cash comes back on a predictable schedule. In Mercury Treasury, the ladder is the long-term part of your portfolio: the cash you don't expect to need for a year or more. This article covers what Treasuries are, how your ladder works day to day, what happens when a rung matures, and the limits that apply.

What US Treasuries are

US Treasuries are debt securities issued by the US government. When you buy one, you're lending to the US Treasury Department in exchange for repayment of the security's par value on a set date, its maturity date. They come in three forms:

• Treasury bills mature in one year or less. They don't pay interest along the way. You buy them below face value and receive full face value at maturity; the difference is your return.
• Treasury notes mature in two to ten years and pay a fixed interest payment, called a coupon, every six months.
• Treasury bonds mature in more than ten years and also pay a semiannual coupon.

Your Mercury ladder can hold any of the three. What matters for each rung is how much time is left until it matures, not what it was called when it was issued. A 30-year bond with seven months left behaves much like any other security with seven months left to maturity.

Treasuries in your Mercury portfolio are held in an account in your company's name at Apex Clearing Corporation, Mercury Treasury's custodian, and are covered by SIPC protection.

How a ladder works

A ladder spreads your Treasury investment across staggered maturities instead of concentrating them on one date. Mercury builds yours with one rung per month, each maturing on or around the 15th.

Here's a 12-rung ladder for a company that spends $100,000 a month and has $1,200,000 to put into the long-term part of its portfolio:

Each month, one rung matures and $100,000 returns as cash plus interest. Over a year, the whole ladder cycles through. That gives you two things:

• Predictable cash. You know what's coming back and when, which is designed to help you avoid selling a Treasury before it matures.
• Spread-out reinvestment. Because rungs mature at different times, you're never reinvesting everything at one moment's interest rate.

Mercury sizes each rung to about one month of your cash outflows. Rungs are bought in $1,000 increments of face value, and anything left over stays in Near-term.

Why your ladder's value changes every day

Your ladder is shown at market value, updated each day using the bond market’s prior-day closing prices. Between the day a Treasury is bought and the day it matures, its price moves for two reasons: changes in interest rates, and a gradual pull toward its face value as maturity approaches. At maturity, you receive the full face value.

• When rates rise, the price of a Treasury you already hold generally falls. Newer Treasuries pay more, so yours is worth a little less to a buyer today.
• When rates fall, the reverse happens and your Treasury is worth a little more.
• The further a rung is from maturity, the more its price moves with rates. Your nearest rung barely moves; your twelfth moves the most.

None of this changes what a Treasury pays at maturity. Each rung is scheduled to return its full face value on its maturity date. The daily fluctuation only becomes a realized gain or loss if a rung is sold before it matures, which is why Mercury's portfolio logic avoids selling rungs whenever possible.

What happens when a rung matures

On the maturity date, the Treasury pays its face value and the cash is swept into in your Near-term holding (MRGXX) at the end of the day. From there, Mercury's daily portfolio review puts it to work in a fixed order:

1. If Near-term is below its target, the cash stays there to refill it.
2. If Reserve is below its target, the cash moves there next.
3. Otherwise, it's reinvested as a new rung at the far end of your ladder, keeping the ladder rolling.

Coupon payments from notes and bonds follow the same path. Cash from a matured rung is available to withdraw the next business day.

If you've reduced or removed the ladder from your targets, maturing rungs flow back into Near-term and Reserve instead of being reinvested. See Changing your Treasury portfolio.

Minimums and limits

• Per rung: $1,000 minimum, in $1,000 increments. Treasuries are purchased as whole bonds in $1,000 units of face value.
• Smallest practical ladder: about $12,000 for 12 rungs. There's no separate balance requirement for a ladder beyond the standard Treasury account requirements of $250,000.
• Near-term buffer: at least three months of cash. A ladder is only possible when your deposit covers at least four months of outflows, and a portfolio can't be 100% ladder.
• Recommended rungs: up to 12. In Custom you can create up to 36.
• No upper limit on ladder size. Very large orders may take more than one trading day to fill.

Standard Treasury eligibility still applies. See Qualifying for a Treasury account.

Transferring a ladder from another brokerage

Moving existing Treasuries into Mercury in kind (an ACATS transfer) isn't available as a self-serve option. The simplest path is to let them mature or sell them, then transfer the cash. If you hold a large ladder at another institution and want to talk through options, reach out to your relationship manager or message Mercury support.

Why a Treasury's coupon is different from its yield

Coupon is the fixed interest rate set when a note or bond is issued, paid as a percentage of face value. It never changes. Bills have no coupon at all.

Yield is what you earn, annualized, given the price you paid.

Mercury shows yield rather than coupon because yield is what determines your return. Specifically:

• The yield shown for your ladder is yield to maturity: the annualized return if you hold each Treasury until it matures and, for notes and bonds, reinvest the coupons along the way.
• Your ladder’s overall yield is net of fees, including Mercury Advisory’s annual fee and transaction costs built into each Treasury’s price. Individual rung yields include transaction costs but not the advisory fee.
• It's indicative and as of a date. Ladder yields shown before funding are estimates based on the prior day’s closing prices, and they refresh daily. Treasury prices, and so their yields, move throughout the trading day. The yield on each rung is set by the price at which it’s actually bought.
• Once bought, your yield to maturity is locked in. If you hold a Treasury until it matures, you’ll earn the yield set at purchase, whatever happens to market prices along the way. Daily price changes affect your return only if you sell before maturity, when you’d get the market price at that time, which could be more or less than you paid.

For how the yields on all three parts combine into your portfolio's net yield, see How net yield is calculated in Mercury Treasury.

Closing a Treasury account that holds a ladder

Closing your Treasury account requires bringing the balance to $0. If you hold a ladder, every Treasury in it will be sold at market prices before the account closes, which can result in a gain or loss. This applies whether you choose to close your account or Mercury closes it. See Managing your Treasury account for the full closure steps.

U.S. Treasury securities held in a Treasury ladder fluctuate in market value before maturity as interest rates change. Selling a Treasury ladder before its maturity date may result in a gain or loss. Mercury Advisory’s portfolio management is designed to avoid selling Treasury ladders before they mature.

All investing involves risk. Yields fluctuate, may decline, and are not guaranteed. Past performance is not indicative of future results.

Mercury Treasury is offered by Mercury Advisory, LLC, an SEC-registered investment adviser (“Mercury Advisory”). This communication does not constitute an offer to sell or the solicitation of an offer to buy any security. All Brokerage and Clearing services are provided by, and securities are offered through Apex Clearing Corporation, an SEC-registered broker dealer and member FINRA/SIPC. Treasury accounts are not FDIC insured, are not bank deposits, and are not guaranteed by Choice Financial Group or Column N.A., and may lose value. Mercury Advisory is a wholly-owned subsidiary of Mercury Technologies, Inc. Learn more here.