TIPS Outperform Straight Treasuries for the Fourth Consecutive Quarter

In a quarter when the pace of Treasury yield increases moderated, TIPS outperformed comparable maturity straight Treasurys. This was the fourth consecutive quarter that TIPS beat straight Treasurys. On average, TIPS gained 0.9% in the quarter, better than the 0.1% gain on comparable maturity straight Treasurys. The average yield on TIPS rose by 23 basis points (bp) to 0.59%, while the average yield on straight Treasurys increased by 16 bp to 2.74%. As a result, the average spread between straight Treasurys and TIPS yields declined by 7 bp from 222 bp to 215 bp.

A greater increase in TIPS yields ought to have led to TIPS underperforming straight Treasurys. But the negative drag of rising interest rates was more than offset by the CPI inflation adjustment. According to my calculations, the CPI added 1.08% to the average TIPS return during the quarter, the largest inflation adjustment in three years.