TIPS Outperform Treasurys in the 2019 First Quarter

Treasury Inflation-Protected Securities outperformed comparable maturity straight Treasurys to a surprising degree in the 2019 first quarter. On average, TIPS earned an annualized return of 3.6% in the quarter, better than the 2.7% return on straight Treasurys.

The outperformance was achieved despite a negative inflation adjustment – i.e. a reduction in the principal of the bonds due to the decline in headline CPI. The average TIPs bond lost 0.5% of principal or $5 per $1,000 of par value in the quarter. The percentage loss was equal to the change in the CPI from October to January.

During the quarter, the average yield on TIPS bonds declined by 94 basis points (bp) to 0.40%. Short-term TIPS experienced the greatest reversal in yield, falling from 2.07% to -0.01%. Short-term TIPS yields are especially volatile because comparatively small changes in the prices of those bonds usually have an outsized effect on annualized yields. Yields on intermediate- and long-term TIPS decline by 49 bp and 31 bp, respectively (to 0.49% and 0.89%).

The volatility in short-term TIPS yields is evident from a look at shifts in the TIPS yield curve over time.

The chart above shows the significant shift in the short-end of the TIPS yield curve from Dec. 31, 2018 to Mar. 29, 2019. Over that period, the yield on the shortest-dated TIPS bond fell from 5.29% to -2.87%. (As noted, because the maturity of those bonds was only weeks away, even modest moves in price will have a significant impact on yield.) Nevertheless, the sharp move in the shortest maturity TIPS bonds and other bonds with nearby maturities does reflect a change in investor focus, which I believe is driven by expectations of near-future changes in the CPI.