Lark Research

TIPS outperformed in 19Q4, gaining 0.5% vs. a 1.4% decline for Treasuries. The average TIPS yield declined by 19 bps to 0.24%, while Treasury yields rose 13 bp to 1.87%. The average breakeven spread rose 32 bp to 163 bp.

Treasurys outperformed TIPS in 19Q2, gaining 3.2% vs. 3.0%. With these gains, the average TIPS yield rose by five basis points to 0.45%, while the average Treasury yield fell 44 bp to 2.01%, reducing the average spread by 50 bp to 156 bp. With the strong outperformance, Treasurys now appear to be overvalued vs. TIPS.

TIPS outperformed Treasurys in 19Q1, gaining 3.6% vs. 2.7%. With the gains, the average TIPS yield fell by 94 basis points to 0.40%, but the average spread increased by 74 bp to 206 bp. With the strong outperformance, TIPS now appear to be overvalued vs. straight Treasurys.

TIPS underperformed Treasurys by 40 bp, falling 1.1% due to moderating inflation. The average TIPS yield rose 33 bp to 0.92%, while the breakeven spread fell 10 bp to 205 bp. Recent oil & gas price increases should wake inflation, giving TIPS an edge. Longer-term, the interplay between the FOMC and Treasury yields looms large.

TIPS earned 0.9% in 18Q2, better than the 0.1% earned on straight Treasuries, due to the CPI inflation adjustment. Although May CPI accelerated a bit, the rise in TIPS yields may suggest slowing inflation (perhaps related to trade/tariff concerns). If so, straight Treasurys may be a better buy near term.

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.

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.

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.