Treasurys Outperform TIPS in the 2019 Second Quarter

Comparable maturity straight Treasurys outperformed Treasury Inflation-Protected Securities (TIPS) in the 2019 second quarter, but only slightly. On average, Treasurys earned a return of 3.2% in the quarter, better than the 3.0% return on TIPS.

On a price basis (excluding the inflation adjustment), Treasurys significantly outperformed TIPS. The average TIPS yield rose 5 basis points (bp) in the quarter to 0.45%, while average Treasury yields fell 44 bp to 2.01%. Most of the shortfall in price return on TIPS was therefore made up by the CPI inflation adjustment, which averaged 152 bp in the quarter.

While the average yield on TIPS bonds rose by 5 bp to 0.45%, there were meaningful differences in yield changes across maturities. Short-term TIPS experienced the greatest bump up in yield, increasing from -0.01% to 0.45%. Yields on intermediate-term TIPS dropped by 22 bp to 0.28% and long-term TIPS yields declined by 14 bp to 0.75%.

The chart below shows the shifts in the TIPS yield curve by quarter for 2019. At the short end of the curve, small changes in price typically have a big impact on yield. Accordingly, the shortest maturity TIPS have swung wildly from positive in 18Q4 to negative in 19Q1 and then back to positive in 19Q2. The swings suggest that investors routinely chase returns on short maturity TIPS based upon expected changes in the inflation adjustment. They are willing to accept negative yields on short-term TIPS when they anticipate a solidly positive CPI adjustment, but require positive yields when the CPI adjustment will be small or perhaps even negative.

Moving out on the TIPS yield curve, TIPS yields have shifted lower with each passing quarter, essentially following the performance of straight Treasurys. Those moderate downshifts in yield have produced solid returns on intermediate- and long-term TIPS so far this year.

The decline in straight Treasury yields was more significant in 19Q2. The average Treasury yield across all maturities fell 44 bp to 2.01%. Short-term Treasury yields fell 52 bp to 1.82%, apparently anticipating a significant easing of Federal Reserve policy. Intermediate-term Treasury yields declined 47 bp to 1.91%; while long-term Treasury yields declined 31 bp to 2.47%.