Taking a Time Out? The High Price of Idle Cash

18 May 2023

2 min read

Playing It Too Safe Can Cost Investors Both Return and Income

Since September 2022, other assets beat T-bill returns. High-yield yields are also much higher than cash and inflation.

Past performance and current analysis do not guarantee future results.
US T-bills are represented by the Bloomberg US Treasury Bills 1–3 Months Index; US Treasuries are represented by the Bloomberg US Treasury Index; global high yield is represented by the Bloomberg Global High Yield Index (USD Hedged); US high yield is represented by the Bloomberg US High Yield Index 2% Constrained; US stocks are represented by the S&P 500.
As of April 30, 2023; CPI as of May 10, 2023
Source: Bloomberg, S&P, US Bureau of Labor Statistics and AllianceBernstein (AB)

Parking your fixed-income assets in cash may seem like a safe choice in today’s volatile investing environment, but it’s actually a risky proposition. Here are three reasons why sitting on the sidelines can be a dangerous game.

First, the opportunity cost is huge. While you’re rolling Treasury bills and waiting for the right time to reenter the market, you’re losing out on the daily income accrual provided by higher-yielding bonds. Today, the US high-yield market offers yields of 8.5%, on average, compared to one- to three-month T-bills at 4.9%. Remember, fixed-income returns are mainly derived from earning income with the passage of time.

Second, you can’t keep up with inflation. Even though T-bills are yielding more than they have in a long time, they still struggle to keep up with inflation. Today, T-bills yield 4.9%—the same as US headline inflation and well below inflation levels in Europe and elsewhere.

Third, timing reentry is virtually impossible, even for the pros. We’ve already established that while you’re waiting for a downturn to unfold, you’re losing out on income. And there’s no telling how long that wait will be. But that’s not all. Because high-yield downturns tend to be very short-lived, you also risk missing the rebound.

High-yield rebounds tend to be both swift and outsized. On average, since 2000, US high yield rebounded from peak-to-trough losses exceeding 5% in just five months—and as few as two. Over the 12 months following such losses, the US high-yield market returned 22% on average. Reluctant investors missed out.

The bottom line? The odds of meeting your investment goals over any reasonable horizon are much poorer when you’re not fully invested. Alternative approaches to income investing may be less volatile than you’d think.

The views expressed herein do not constitute research, investment advice or trade recommendations, do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

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