TIPS Underperform Treasurys Slightly in 26Q3 as Interest Rates Rise Sharply.
Treasury Inflation-Protected Securities (TIPS) posted a loss of 4.3% in the 2026 third quarter, slightly worse than the 4.0% average loss on comparable maturity straight Treasurys. The return on TIPS was driven by an average 500 bp decline in price offset partially by 49 bp of yield and 27 bp from the CPI inflation adjustment.
The returns on short-term and intermediate TIPS were about even with those on U.S. Treasurys, but TIPS underperformed in the longer maturities. The relative performance difference for TIPS was –10 bp in the short maturities, –10 bp in the intermediates and –90 bp on the long maturities, according to my estimates.
The average TIPS yield ended the quarter at 2.74%, up 59 basis points (bp) from 2.15% at the end of the 2026 second quarter. TIPS yields rose 33 bp in the short maturities, 79 bp in the intermediates, and 65 bp in the long maturities. Average straight Treasury yields ended the quarter at 5.15%, up 76 bp from 4.39% in 26Q2. Short-maturity Treasury yields rose 62 bp, intermediates rose 90 bp and long maturities rose by 76 bp. With these relative yield changes, the average breakeven spread increased by 14 bp from 224 bp at June 30 to 238 bp at September 30. The increase in spreads was greater in the short maturities, where the average spread rose by 18 bp. Intermediate spreads increased by 11 bp and long maturity also increased by 18 bp.
The CPI inflation adjustment was 27 bp in 26Q3, a significant drop from 240 bp in 26Q2, as headline inflation was little changed. (As a reminder, the CPI adjustment is based upon the headline CPI without seasonal adjustment. The seasonally adjusted CPI for all urban consumers rose from April to July, the period for which the 26Q3 adjustment was measured, by only 0.12%, less than the non-seasonally adjusted CPI.) Headline CPI was up 0.32% in August and the prompt month futures contract for West Texas Intermediate crude oil was up 7.7% from September 1 to October 2. The mid-term elections and potential geopolitical events could spark volatility. Right now, the CPI adjustment looks like it will be higher for 26Q4.
As noted, TIPS yields rose by 59 bp on average in 26Q3 from 26Q2. The TIPS yield curve shifted up sharply, with yields rising the most across the intermediate maturities.
The U.S. Treasury yield curve shifted sharply higher from June 30 to September 30, sparked by a 25 bp Fed rate hike and continuing concerns about inflation. As noted, intermediate yields rose the most, followed by long-term yields. There has been a global sell-off as investors everywhere are concerned about rising budget deficits and higher inflation, as well as continuing uncertainty about the conflicts in Iran and Ukraine.
As noted, the quarterly inflation adjustment was just 27 bp in 26Q3 down sharply from 240 bp in 26Q2. The chart below, which tracks the quarter CPI inflation adjustment from the 2020 first quarter shows that CPI inflation has been quite volatile this year following a period of relative calm from the end of 2022 to the end of 2025.
The breakeven rate or spread, a measure of longer-term inflation expectations, increased by 18 bp in 26Q3 from 224 bp to 242 bp. The increase was greatest across the short maturities, where spreads rose by 29 bp to 249 bp. Intermediate spreads and long-term spreads increased by 11 bp to 241 bp and 235 bp, respectively.
Although the rise in yields has been a major concern for the financial markets, the 26Q3 increase was modest and orderly, compared to whipsawing that yields and spreads experienced in previous quarters. So far, the spread remains only moderately above its long-term average of 193 bp and within its range over the 2021-2026 period.
It may be surprising to some that TIPS have sold off, even as concerns about inflation have risen. Core inflation that remains above the Fed’s target is what prompted it to raise the Fed Funds target rate by 25 basis points to 3.75%-4.00% in September. Although headline CPI inflation was benign in 26Q3, there are signs that inflation is on the rise. So why have TIPS sold off?
It is often the case that TIPS struggle during periods of rising interest rates, as their yields rise in step with straight Treasurys. In recent years, TIPS have reacted only to short-term changes in CPI inflation, as investors move in and out to capture that short-lived extra return. Long-term inflation expectations have so far been fairly well anchored.
Should longer-term inflation expectations rise more significantly, TIPS may be a better investment than straight Treasurys. The increase in inflation expectations would serve to cushion, but not eliminate, the losses from rising yields. In the past, an increase in the yield spread to 275 bp or higher has proven to be a good buying opportunity. This time around, with those budget deficits and geopolitical concerns, it is hard to know whether that maxim will still hold true.
October 4, 2026
Stephen P. Percoco
Lark Research
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© 2015-2026 by Stephen P. Percoco, Lark Research. All rights reserved.
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