TIPS declined 1.1% on average in the 2018 first quarter, less than the 1.6% decline in comparable maturity straight Treasurys. The average breakeven spread widened to 222 bp from 184 bp at the end of 2017. Short-maturity TIPS delivered a positive return, as investors sought a haven from rising interest rates and inflation.
TIPS finished the year with a very strong performance, their best since the 2016 second quarter. For the 2017 fourth quarter, TIPS posted a total return of 1.8%, much better than the 0.2% on comparable maturity straight Treasurys.
TIPS fell 0.3% vs. a 1.5% gain in Treasurys. The average TIPS yield rose 41 bp to 0.40%, while Treasurys slipped 4 bp to 2.03%. The average TIPS spread narrowed to 163 bp from 208 bp. Poor relative performance was due to rising short-term rates, decreasing inflation expectations and declining long-term Treasury yields.
After the run-up in the fourth quarter, both TIPS and comparable maturity Treasurys delivered positive returns during the first month of 2017. According to my estimates, TIPS posted a monthly return of 0.7%, modestly better than the 0.3% return on comparable maturity Treasurys.
As a result of the post-election sell-off in bonds, treasury inflation-protected securities recorded a loss of 3.0% in the 2016 fourth quarter, their worst performance since the 2013 second quarter.