TIPS Outperform Treasurys in the 2025 Third Quarter Even Though Inflation Expectations Remain Stable
Treasury Inflation-Protected Securities (TIPS) posted an average gain of 2.0% in the 2025 third quarter, better than the 1.6% average gain on comparable maturity straight Treasurys. The return on TIPS was composed of an estimated price increase of 80 basis points (bp), interest income of 45 bp and inflation adjustment of 70 bp.
TIPS exceed Treasury performance across all maturities. The relative performance difference for TIPS was +20 bp in the short maturities, +100 bp in the intermediates and +10 bp on the long maturities, according to my calculations.
The average TIPS yield ended the quarter at 1.57%, down 16 basis points (bp) from 1.73% at the end of the 2025 second quarter. TIPS yields fell 27 bp in the short maturities,15 bp in the intermediates and 6 bp in the long maturities. Average straight Treasury yields ended the quarter at 4.05%, down 10 bp from 4.15% in 25Q2. Short-maturity Treasury yields declined 13 bp, intermediates by 8 bp and long maturity yields by 7 bp. With these relative yield changes, the average breakeven spread increased by 7 bp to 249 bp at September 30 from 242 bp at June. The increase was concentrated in short maturities, where the average spread rose 13 bp. Intermediate spreads rose 8 bp; but long maturity spreads decreased 2 bp.
As noted, the CPI inflation adjustment was about 70 bp, down from 100 bp in 25Q2, as headline inflation eased slightly. All components of the return – interest income, yield and inflation adjustments contributed positively to TIPS returns in the quarter.
As noted, TIPS yields dropped by 16 bp on average. The TIPS yield curve shifted downward across short and intermediate maturities in 25Q3. Long-term TIPS yields were essentially unchanged as shown in the chart on the next page.
Since the end of 2024, the straight Treasury yield curve shifted downward, but 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, low intermediate yields suggest a greater risk of an intermediate-term economic slowdown. In 25Q3, short term yields dropped as the Fed began to ease, but long-term yields were down only modestly. As long as there are no disruptions, it would seem that short-term Treasury yields will continue to decline as the Fed eases.
The quarterly TIPS inflation adjustment was 0.70% in 25Q3, down from 1.00% in 25Q2. Although concerns about the potential impact of tariffs have mostly been ignored by the financial markets, they will likely cause a pick up in inflation. But it is difficult to predict how quickly and by how much they will show up in consumer prices.
The breakeven rate or spread, a measure of inflation expectations, was little changed in 25Q3, increasing from 242 bp to 249 bp. The increase was greatest across the short maturities, where spreads rose by 13 bp to 262 bp. Intermediate spreads rose by 8 bp to 242 bp. Long-term spreads decreased by 2 bp to 233 bp.
As noted in my previous report, the direction of travel from here is difficult to forecast given the specter of political intervention in Fed policies and the economy. The push by the President for lower interest rates seems to have subsided a bit, probably because the Fed has started to ease and the financial markets expect another 25 bp cut at the FOMC’s next meeting on October 29. Meanwhile, concerns about tariffs keep popping up, as they did a little over one week ago when trade negotiations between the U.S. and China appeared to break down. For all the concerns and the potential for increased volatility in the stock market, TIPS have been surprisingly stable and have earned better returns so far in 2025 than most fixed income sectors.
October 20, 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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