TIPS Underperform Straight Treasurys in the 2017 Second Quarter

TIPS underperformed comparable maturity straight Treasury securities significantly in the 2017 second quarter. The average TIPS lost -0.3% in the quarter, while straight Treasurys gained 1.5%. The divergence in performance was due primarily to three factors: (1) the rise in short-term Treasury yields that coincided with the FOMC’s Fed Funds target rate hikes; (2) the decline in oil & gas prices, which dimmed the near-term outlook for the CPI and (3) the decline in long-term Treasury yields that was probably due to expectations of low inflation and moderating growth in the economy.

The average yield on TIPS jumped by 42 basis points (bp) from -0.01% at March 31, 2017 to 0.40% at June 30. The majority of the jump in yields was concentrated in the shorter maturities, where yields increased by 85 bp to 0.03%. Medium-term TIPS yields increased by 12 bp and long-term TIPS yields increased by 5 bp.

In contrast, comparable maturity Treasury yields declined by 4 bp on average to 2.03%. Short-term Treasury yields rose 8 bp; but medium-term Treasury yields fell by 12 bp and long-term Treasury yields fell by 19 bp. The decline in long-term Treasury yields translated into a very strong total return of 4.1% for the quarter.