Treasury Bills and Inflation

Trevino, Ruben C.; Yates, Barbara M.
July 2010
Journal of Financial Planning;Jul2010, Vol. 23 Issue 7, p56
Academic Journal
• The objective of this paper is to examine the historical performance of Treasury bills relative to bonds and stocks under different inflationary conditions. • Over the period studied, Treasury bill yields were positively correlated with inflation and on average provided nominal returns before taxes above the inflation rate. However, on an estimated after-tax basis, the real returns became negative and thus did not preserve an investor's capital. • Furthermore, the long-term average real return on Treasury bills was lower than the average real return on bonds and stocks, especially on an estimated after-tax basis. Thus, stocks and bonds provided better long-run protection against inflation. • However, Treasury bills performed better than bonds and stocks in years when inflation was very high. Treasury bill returns were highly correlated with inflation levels on a year-to-year basis, while bond and stock returns were not. • Similarly, Treasury bills performed better than bonds and stocks in years when inflation increases were large. Stocks and bonds were adversely affected by increases in inflation, while Treasury bill returns were not. • Historical experience suggests that over the long run Treasury bills are not a good hedge against inflation. However, because stocks and bonds are more adversely affected by high inflation levels and/or large increases in inflation, Treasury bills could temporarily serve as a refuge.


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