In which scenarios will cash outperform TIPS?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
VartAndelay
Posts: 276
Joined: Tue Mar 03, 2015 10:29 pm

In which scenarios will cash outperform TIPS?

Post by VartAndelay »

Other than if someone needs cash ASAP for some immediate spending (such as an emergency fund), what is the argument for holding cash over TIPS?
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: In which scenarios will cash outperform TIPS?

Post by JoMoney »

Any guaranteed bond/CD is a better investment than cash if you can hold the bond to maturity.
You run into problems when you're holding a bond of a longer term, and you need to find someone to buy it off you, and the market is offering similar bonds at a lower price/higher rate.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Topic Author
VartAndelay
Posts: 276
Joined: Tue Mar 03, 2015 10:29 pm

Re: In which scenarios will cash outperform TIPS?

Post by VartAndelay »

JoMoney wrote: Fri Dec 03, 2021 7:38 am Any guaranteed bond/CD is a better investment than cash if you can hold the bond to maturity.
You run into problems when you're holding a bond of a longer term, and you need to find someone to buy it off you, and the market is offering similar bonds at a lower price/higher rate.
Does this also apply to bond funds or only direct bonds? For example Vanguard offers short term, intermediate term, and long term treasury bond funds. Would these also necessarily be better investments than cash if holding to maturity, or would that only apply to direct bonds? I presume these bond funds are frequently adjusting their holdings, so maybe the concept of "holding to maturity" doesn't even apply for a holder of these bond funds?
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: In which scenarios will cash outperform TIPS?

Post by JoMoney »

VartAndelay wrote: Fri Dec 03, 2021 7:42 am
JoMoney wrote: Fri Dec 03, 2021 7:38 am Any guaranteed bond/CD is a better investment than cash if you can hold the bond to maturity.
You run into problems when you're holding a bond of a longer term, and you need to find someone to buy it off you, and the market is offering similar bonds at a lower price/higher rate.
Does this also apply to bond funds or only direct bonds? For example Vanguard offers short term, intermediate term, and long term treasury bond funds. Would these also necessarily be better investments than cash if holding to maturity, or would that only apply to direct bonds? I presume these bond funds are frequently adjusting their holdings, so maybe the concept of "holding to maturity" doesn't even apply for a holder of these bond funds?
Yes, "holding to maturity" doesn't really apply to a bond fund, as the fund is a portfolio of lots of bonds with different maturities.
The fund likely targets a specific constant maturity of its bonds, say "intermediate bonds with maturities 5-10 years out", so it will always be selling some of its holdings as the maturities get closer and buying new bonds with maturities further out to keep the funds portfolio around the target.

Bond fund holders can mix their bond fund with other shorter duration funds and cash, and by making gradual adjustments over time to match the duration of something like a bond ladder that has rungs maturing over time, and the overall portfolio duration getting shorter and shorter, and this should be able to get very close to holding individual bonds to their maturity, but it takes work on the individual to make their portfolio match what they want - the fund isn't going to change the funds objective. Their are some bond funds that target a specific maturity date, but those aren't common.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: In which scenarios will cash outperform TIPS?

Post by dbr »

VartAndelay wrote: Fri Dec 03, 2021 7:32 am Other than if someone needs cash ASAP for some immediate spending (such as an emergency fund), what is the argument for holding cash over TIPS?
Most choices in investing turn on preferences to suit individual circumstances rather than constitute arguments.

In this case you could make a list of the relevant properties of cash and of TIPS and decide where your preference lies. It is not normally useful to try to tell another person what they should prefer though it can be useful to comment on what properties different things have.

Right off the bat cash has the property that the value of the holding is fixed in nominal dollars under all circumstances while TIPS have variable value on the market, including at the point of purchase at auction and especially if held as a fund that does not mature, and that the government agrees to increase the value according to an inflation index.

For some people the relevance of cash might be that there are many more places it can be stored, from currency in your wallet to a checking account, while TIPS can only be bought as bonds at TD or a broker or held in a mutual fund or ETF. Different people have different ideas what cash is. I even go so far as to claim that credit cards operate as cash in the sense that you can use them to pay for things the same as cash.
Robot Monster
Posts: 4215
Joined: Sun May 05, 2019 11:23 am

Re: In which scenarios will cash outperform TIPS?

Post by Robot Monster »

JoMoney wrote: Fri Dec 03, 2021 7:38 am Any guaranteed bond/CD is a better investment than cash if you can hold the bond to maturity.
Currently, I can get 1.20% on a 5yr Treasury. Could cash not yield higher than that in average over the next five years, if, for example, inflation forces the Fed's hand to aggressively hike rates?
Tamales
Posts: 1644
Joined: Sat Jul 05, 2014 10:47 am

Re: In which scenarios will cash outperform TIPS?

Post by Tamales »

Robot Monster wrote: Fri Dec 03, 2021 9:49 am
JoMoney wrote: Fri Dec 03, 2021 7:38 am Any guaranteed bond/CD is a better investment than cash if you can hold the bond to maturity.
Currently, I can get 1.20% on a 5yr Treasury. Could cash not yield higher than that in average over the next five years, if, for example, inflation forces the Fed's hand to aggressively hike rates?
Just as a point of reference, 5-year CDs have been a tad over 3% at the bigger online banks in the recent past (2-3 years ago?), while other rates, and inflation were low. So sure, your scenario could play out too. There's no direct linkage between them so they can float in both directions.
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: In which scenarios will cash outperform TIPS?

Post by KlangFool »

OP,

Deflation.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Robot Monster
Posts: 4215
Joined: Sun May 05, 2019 11:23 am

Re: In which scenarios will cash outperform TIPS?

Post by Robot Monster »

Tamales wrote: Fri Dec 03, 2021 10:06 am
Robot Monster wrote: Fri Dec 03, 2021 9:49 am
JoMoney wrote: Fri Dec 03, 2021 7:38 am Any guaranteed bond/CD is a better investment than cash if you can hold the bond to maturity.
Currently, I can get 1.20% on a 5yr Treasury. Could cash not yield higher than that in average over the next five years, if, for example, inflation forces the Fed's hand to aggressively hike rates?
Just as a point of reference, 5-year CDs have been a tad over 3% at the bigger online banks in the recent past (2-3 years ago?), while other rates, and inflation were low. So sure, your scenario could play out too. There's no direct linkage between them so they can float in both directions.
Just detailing a scenario where cash outperforms, which is OP's question (at least in the subject line). Personally, I have a mix of cash and TIPS, vaguely matching the "An Investor in Late Retirement" allocation below. (Except instead of having short-term bonds, I have cash).

From Bogleheads’ Guide to Investing book:

Image
Last edited by Robot Monster on Fri Dec 03, 2021 11:03 am, edited 1 time in total.
Robot Monster
Posts: 4215
Joined: Sun May 05, 2019 11:23 am

Re: In which scenarios will cash outperform TIPS?

Post by Robot Monster »

Deleted
Last edited by Robot Monster on Fri Dec 03, 2021 12:39 pm, edited 1 time in total.
prioritarian
Posts: 485
Joined: Tue Jul 16, 2019 6:00 pm

Re: In which scenarios will cash outperform TIPS?

Post by prioritarian »

KlangFool wrote: Fri Dec 03, 2021 10:12 am OP,

Deflation.

KlangFool
Bonds increase their cash-like value when interest rates approach the zero bond (or go negative). Moreover, due to convexity longer duration bonds (including TIPS) could do well indeed when interest rates are lowered or go negative during periods of deflation.
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: In which scenarios will cash outperform TIPS?

Post by KlangFool »

prioritarian wrote: Fri Dec 03, 2021 11:45 am
KlangFool wrote: Fri Dec 03, 2021 10:12 am OP,

Deflation.

KlangFool
Bonds increase their cash-like value when interest rates approach the zero bond (or go negative). Moreover, due to convexity longer duration bonds (including TIPS) could do well indeed when interest rates are lowered or go negative during periods of deflation.
prioritarian,

OP asked specifically about cash versus TIPS. In the time of deflation, what is the interest rate of TIPS? Negative or zero? Do you know the answer? I do not know.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
prioritarian
Posts: 485
Joined: Tue Jul 16, 2019 6:00 pm

Re: In which scenarios will cash outperform TIPS?

Post by prioritarian »

KlangFool wrote: Fri Dec 03, 2021 11:48 am In the time of deflation, what is the interest rate of TIPS? Negative or zero? Do you know the answer? I do not know.
Interest rates would decrease or go negative because deflation is something that monetary authorities would like to reverse.
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: In which scenarios will cash outperform TIPS?

Post by KlangFool »

prioritarian wrote: Fri Dec 03, 2021 11:50 am
KlangFool wrote: Fri Dec 03, 2021 11:48 am In the time of deflation, what is the interest rate of TIPS? Negative or zero? Do you know the answer? I do not know.
Interest rates would decrease or go negative because deflation is something that monetary authorities would like to reverse.
prioritarian,

So, it looks like cash beats TIPS during deflation.

https://www.treasurydirect.gov/indiv/pr ... glance.htm
<< Treasury Inflation-Protected Securities (TIPS)

Treasury Inflation-Protected Securities, or TIPS, provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.

TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation.>>

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
prioritarian
Posts: 485
Joined: Tue Jul 16, 2019 6:00 pm

Re: In which scenarios will cash outperform TIPS?

Post by prioritarian »

KlangFool wrote: Fri Dec 03, 2021 11:53 am
prioritarian wrote: Fri Dec 03, 2021 11:50 am
KlangFool wrote: Fri Dec 03, 2021 11:48 am In the time of deflation, what is the interest rate of TIPS? Negative or zero? Do you know the answer? I do not know.
Interest rates would decrease or go negative because deflation is something that monetary authorities would like to reverse.
prioritarian,

So, it looks like cash beats TIPS during deflation.

https://www.treasurydirect.gov/indiv/pr ... glance.htm
<< Treasury Inflation-Protected Securities (TIPS)

Treasury Inflation-Protected Securities, or TIPS, provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.


TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation.>>

KlangFool
The treasury guarantees the principal of TIPs but deflation could cause the TIPs coupon to drop to zero.

https://www.treasurydirect.gov/indiv/re ... s_tips.htm
The relationship between TIPS and the Consumer Price Index affects both the sum you are paid when your TIPS matures and the amount of interest that a TIPS pays you every six months. TIPS pay interest at a fixed rate. Because the rate is applied to the adjusted principal, however, interest payments can vary in amount from one period to the next. If inflation occurs, the interest payment increases. In the event of deflation, the interest payment decreases.

At the maturity of a TIPS, you receive the adjusted principal or the original principal, whichever is greater. This provision protects you against deflation.
However, as interest rates plummet (as they do during deflation) the PRICE of longer duration TIPs would likely increase. Thus TIPs would likely be better than cash but worse than treasuries during deflation*.
tonyclifton
Posts: 992
Joined: Sat Feb 08, 2020 4:25 pm

Re: In which scenarios will cash outperform TIPS?

Post by tonyclifton »

KlangFool wrote: Fri Dec 03, 2021 10:12 am OP,

Deflation.

KlangFool
Deflation has not occurred since the existence of TIPS so there is no precedent to look back to.
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: In which scenarios will cash outperform TIPS?

Post by KlangFool »

tonyclifton wrote: Fri Dec 03, 2021 12:10 pm
KlangFool wrote: Fri Dec 03, 2021 10:12 am OP,

Deflation.

KlangFool
Deflation has not occurred since the existence of TIPS so there is no precedent to look back to.
That is true. Then, the question should be as per the rule governing TIPS, what happened during deflation.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: In which scenarios will cash outperform TIPS?

Post by willthrill81 »

This seems like defining the question in terms of the desired outcome.
The Sensible Steward
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: In which scenarios will cash outperform TIPS?

Post by KlangFool »

willthrill81 wrote: Fri Dec 03, 2021 2:09 pm This seems like defining the question in terms of the desired outcome.
Do not understand your point.

OP asked:

Under what condition would cash outperform TIPS?

My answer is deflation.

Hence, folks are trying to answer the question as per the rule governing TIPS, is that true?

Aka, in the case of deflation, cash outperform TIPS.

I do not know TIPS. Hence, I am asking the question.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
tonyclifton
Posts: 992
Joined: Sat Feb 08, 2020 4:25 pm

Re: In which scenarios will cash outperform TIPS?

Post by tonyclifton »

KlangFool wrote: Fri Dec 03, 2021 2:13 pm Under what condition would cash outperform TIPS?

My answer is deflation.

Hence, folks are trying to answer the question as per the rule governing TIPS, is that true?

Aka, in the case of deflation, cash outperform TIPS.

I do not know TIPS. Hence, I am asking the question.

KlangFool
Here is an authoritative answer to the topic of deflation:

https://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips_faq.htm

"What happens to TIPS if deflation occurs?
The principal is adjusted downward, and your interest payments are less than they would be if inflation occurred or if the Consumer Price Index remained the same. You have this safeguard: at maturity, if the adjusted principal is less than the security's original principal, you are paid the original principal."

According to the above, TIPS should perform no worse than cash on the date of maturity if deflation ate-up all the interest payments.
tonyclifton
Posts: 992
Joined: Sat Feb 08, 2020 4:25 pm

Re: In which scenarios will cash outperform TIPS?

Post by tonyclifton »

Here are three scenarios where cash could perform "better" than TIPS:

1. If you bought a TIP at auction and sold it before maturity, cash could perform "better".

2. Likewise, if you bought a TIP on the secondary market, and paid a premium, and didn't hold it to duration then cash could perform "better."

3. If you bought a TIPS fund and sold it on a market down day, at a cumulative loss, then cash could have performed "better".

#1 and #2 are probably fair to the OP's intent. #3 is likely not what was intended by the question.
Last edited by tonyclifton on Fri Dec 03, 2021 2:48 pm, edited 1 time in total.
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: In which scenarios will cash outperform TIPS?

Post by willthrill81 »

KlangFool wrote: Fri Dec 03, 2021 2:13 pm
willthrill81 wrote: Fri Dec 03, 2021 2:09 pm This seems like defining the question in terms of the desired outcome.
Do not understand your point.

OP asked:

Under what condition would cash outperform TIPS?

My answer is deflation.

Hence, folks are trying to answer the question as per the rule governing TIPS, is that true?

Aka, in the case of deflation, cash outperform TIPS.

I do not know TIPS. Hence, I am asking the question.

KlangFool
Questions such as these should be framed in terms of findings the 'best' solution to a given problem, not finding the 'best' problem for a given solution.
The Sensible Steward
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: In which scenarios will cash outperform TIPS?

Post by dbr »

willthrill81 wrote: Fri Dec 03, 2021 2:33 pm
KlangFool wrote: Fri Dec 03, 2021 2:13 pm
willthrill81 wrote: Fri Dec 03, 2021 2:09 pm This seems like defining the question in terms of the desired outcome.
Do not understand your point.

OP asked:

Under what condition would cash outperform TIPS?

My answer is deflation.

Hence, folks are trying to answer the question as per the rule governing TIPS, is that true?

Aka, in the case of deflation, cash outperform TIPS.

I do not know TIPS. Hence, I am asking the question.

KlangFool
Questions such as these should be framed in terms of findings the 'best' solution to a given problem, not finding the 'best' problem for a given solution.
I was trying to think how to answer this question and I think the above is a good answer.
venkman
Posts: 1338
Joined: Tue Mar 14, 2017 10:33 pm

Re: In which scenarios will cash outperform TIPS?

Post by venkman »

As of market close today, a 5-year TIPS has a negative real yield of -1.59%.

Cash will outperform a 5-year TIPS over the next 5 years if inflation comes in at less than (1.59% + yield on cash).
AlwaysLearningMore
Posts: 1934
Joined: Sun Jul 26, 2020 2:29 pm

Re: In which scenarios will cash outperform TIPS?

Post by AlwaysLearningMore »

JoMoney wrote: Fri Dec 03, 2021 7:38 am Any guaranteed bond/CD is a better investment than cash if you can hold the bond to maturity.
You run into problems when you're holding a bond of a longer term, and you need to find someone to buy it off you, and the market is offering similar bonds at a lower price/higher rate.

The 2-year Treasury is only marginally superior to at least one online bank.

Image
https://tinyurl.com/gryvaf3


Image
https://www.firstib.com/personal/bank/m ... -accounts/
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
Post Reply