Treasurys Slightly Outperform TIPS in the 2025 Second Quarter as Inflation Expectations Ease
Treasury Inflation-Protected Securities (TIPS) posted an average gain of 0.2% in the 2025 second quarter, lower than the 0.7% gain on comparable maturity straight Treasury securities. The return on TIPS was composed of an estimated average price drop of 110 basis points (bp), interest income of 35 bp and inflation adjustment of 100 bp.
TIPS matched Treasury performance in the short maturities and underperformed Treasurys across the intermediate and long maturities. The relative performance difference for TIPS was -30 bp in the intermediates and -130 bp on the long maturities, according to my calculations.
The average TIPS yield ended the quarter at 1.73%, up 34 basis points (bp) from 1.39% at the end of the 2025 first quarter. TIPS yields rose 58 bp in the short maturities, were unchanged in the intermediates and rose 14 bp in the long maturities. Average straight Treasury yields ended the quarter at 4.15%, down 3 bp from 4.18% in 25Q1. Short-maturity Treasury yields declined 10 bp and intermediates 14 bp, but long maturity yields rose 16 bp. With these relative yield changes, the average breakeven spread declined by 37 bp to 242 bp at June 30 from 279 bp at March 31. Most of the decline was at the short end of the yield curve.
As noted, the CPI inflation adjustment was about 100 bp, up modestly from 65 bp in 25Q1, as headline inflation from January to April picked up slightly. Interest income and inflation adjustments more than offset the modest price declines in the total return equation for TIPS in the quarter, but the 25Q2 total return was low at only 0.2%, compared with 3.8% in 25Q1.
As noted, TIPS yields rose by 34 bp on average. The TIPS yield curve shifted downward across all maturities in 25Q1, but it shifted higher across the short and long maturities in 25Q2, as shown below.
Since the end of 2024, the straight Treasury yield curve shifted downward, but short and long-term yields have dropped far less than intermediates. Thus the Treasury yield curve has sagged in the middle. Technically, the yield curve remains upward sloping with the highest yields in the longest maturities. However, falling intermediate yields suggest a greater risk of an intermediate-term economic slowdown. In 25Q2, short term yields were little changed, but intermediate yields fell, while long term yields rose modestly. The sag in the intermediate yields ended 25Q2 up slightly from the lows seen at the end of April.
The quarterly TIPS inflation adjustment was 1.00% in 25Q2, up from 25Q1’s 0.65% increase. Although concerns about the potential impact of tariffs receded in 25Q2, they will likely cause a pick up in inflation, but it is difficult to predict how quickly they will show up in consumer prices. Some economists suggest that about half of the tariff increases will be passed on to consumers, while the other half will be absorbed by importers and exporters.
The decrease in the breakeven rate from 279 bp to 242 bp suggests a modest easing of inflation expectations. The decrease was more pronounced across short maturities, where spreads fell from 319 bp to 251 bp. The decline in intermediate and long-term yields was much more modest at 15 bp and 5 bp to 234 bp and 235 bp, respectively. At the end of 25Q2, the breakeven rate of 242 bp was higher than the 16-year average of 190 bp, but below the maximum spread of 364 bp recorded in 22Q1.
The direction of travel from here is difficult to forecast given the specter of political intervention in Fed policies. President Trump has repeatedly called for lower interest rates, even in the face of a (likely temporary) pick-up in inflation. If Mr. Trump gets his way, the short end of the Treasury and TIPS yield curves could rally, but bond investors may drive longer yields higher out of concern for a potential increase in long-term inflation. Some strategists predict increases in TIPS spreads (presumably drive by lower TIP yields as investors seek protection from inflation), but I believe it is difficult to make that call at the long end of the curve. History has shown that when Treasury yields become more volatile, TIPS yields usually rise to account for the greater uncertainty.
July 9, 2025
Stephen P. Percoco
Lark Research
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© 2015-2025 by Stephen P. Percoco, Lark Research. All rights reserved.
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