A friend recently asked why investors are willing to accept a zero yield on T-bills. Wouldn't that also imply a negative inflation-adjusted return?
My reply: If you have money to invest and you don't want risk, you have no choice but to invest in T-bills. That's not entirely true, actually, since you could convert your funds to currency and hold the currency under your mattress. Either way you would get a zero rate of return, but T-bills give you liquidity and portability, and if you're talking about serious sums of money, T-bills eliminate the hassle and risk of acquiring, storing and disposing of currency. As for the negative real return part of the question, that depends on future inflation. Inflation according to the CPI has averaged 3.6% over the past two years, whereas T-bill yields have averaged about 3%, so that means that risk-free cash has given you a negative real rate of return of about 0.6% a year. Looking forward is another story. Right now the bond market is obsessed with the prospect of negative inflation (deflation) for the next several years; you can see that in the very high negative breakeven spreads on TIPS (e.g., 5-7% on 1- and 2-year TIPS). So on an expectations basis, investors think that an investment in T-bills offers them a handsome positive real return in addition to liquidity and portability.
If you don't believe in deflation, however, then T-bills look like an awful investment, and TIPS would be your preferred risk-free asset.