TIPS Outperform Straight Treasurys Slightly in a Quiet 2017 Third Quarter

In what was a surprisingly quiet quarter for the Treasury market, TIPS outperformed straight Treasurys. According to my calculations, TIPS on average earned 0.9 percent in the 2017 third quarter compared to 0.6 percent for straight Treasurys. Investors bid the prices on short-term TIPS up so that short-term TIP yields fell back into negative territory, even though inflation (as measured by the CPI) eased during the quarter. On balance, TIP yields declined from 0.40 percent in the 2017 second quarter to 0.27 percent in the third quarter. Straight Treasury yields (on comparable maturities) increased slightly from 2.03 percent to 2.08 percent, mostly because of an increase at the short-end of the yield curve.

At quarter’s end, the TIPS yield curve was up modestly over the prior year, but it is little changed so far in 2017.