TIPS Outperform Treasurys in 26Q2. Returns were Modest But With Volatility in Prices and the Inflation Adjustment
.Treasury Inflation-Protected Securities (TIPS) earned 1.1% in the 2026 second quarter, modestly better than the 0.4% average gain on comparable maturity straight Treasurys. Although the returns on both TIPS and Treasurys were modest, there was significant volatility in both TIP yields (driven by price swings) and the inflation adjustment. In rough terms, the return on TIPS was driven by a 240 bp benefit from the CPI inflation adjustment and a 35 bp yield contribution, partially offset by an estimated price decline of 165 basis points (bp).
TIPS outperformed Treasurys across all maturities. The relative performance difference for TIPS was +30 bp in the short maturities, +50 bp in the intermediates and +150 bp on the long maturities, according to my estimates.
The average TIPS yield ended the quarter at 2.15%, up 71 basis points (bp) from 1.44% at the end of the 2026 first quarter. TIPS yields rose 155 bp in the short maturities, 36 bp in the intermediates, and 6 bp in the long maturities. Average straight Treasury yields ended the quarter at 4.39%, up 17 bp from 4.22% in 26Q1. Short-maturity Treasury yields rose 28 bp, intermediates rose 17 bp and long maturities rose by 1 bp. With these relative yield changes, the average breakeven spread decreased by 55 bp from 279 bp at March 31, 2026 to 224 bp at June 30. The decrease in spreads was most pronounced in the short maturities, where the average spread fell by 125 bp. Intermediate spreads decreased by 19 bp and long maturity spreads decreased 4 bp.
The CPI inflation adjustment was 240 bp, up from -11 bp in 26Q1 as headline inflation soared due to the conflict in Iran. This was the highest quarterly CPI adjustment since the 2022 second quarter. Despite the high CPI print, investors sold short-term TIPS in anticipation of a lower future payout associated expected from the decrease in inflation with the announced agreement with Iran to suspend the conflict. Since the conflict is now back on, inflation expectations will likely rise, oil has risen 32% from $62 per barrel to $82 as of this writing, but that is still well below the average of $100+ per barrel recorded from March to the beginning of June. While the conflict is back on, the markets apparently believe that the U.S. and Iran will reach another agreement to end it soon.
As noted, TIPS yields rose by 71 bp on average. The TIPS yield curve shifted up sharply across the shortest maturities, with the rise tapering out through the intermediate and long maturities.
Over the past year, the U.S. Treasury yield curve has gyrated along short- and intermediate maturities. The dip across the belly of the curve at June 30, 2025 – a sign of an expected slowdown in the economy – became less pronounced by December 31, as the Fed cut short-term rates. By June 30, 2026, the yield curve normalized to become upward sloping from short- to long-maturities, a sign perhaps of an improving economic outlook. (If so, that would indeed be surprising given the rise in inflation and heightened uncertainty in the geopolitical outlook.) Since the curve is forward looking, this also hints at expectations of a favorable resolution to the Iran conflict.
The quarterly TIPS inflation adjustment was 2.39% in 26Q2, up sharply from -0.11% in 26Q1. As noted, taken at face value, the sharp drop in TIPS prices at quarters’ end signals that investors are now seeking higher yields, especially across the short maturities, to compensate for an expected decline in inflation in 26Q3 and perhaps beyond.
The breakeven rate or spread, a measure of longer-term inflation expectations, decreased by 55 bp in 26Q2 from 279 bp to 224 bp. The decrease was greatest across the short maturities, where spreads fell by 125 bp to 220 bp. Intermediate spreads decreased by 19 bp to 230 bp. Long-term spreads eased by 4 bp to 224 bp.
The breakeven spread for short maturities has whipsawed during the first two quarters of 2026, rising from 145 at December 31, 2025 to 345 bp at March 31, 2026 and then falling to 220 bp at June 30.
A quick comparison of prices and yields shows that little change across the short- and intermediate maturities for TIPS over the past two weeks, since the end of June. Yields across the short end are up by about 10 bp. However, there has been a sell-off in the long maturities, where prices are down 2-3 points on average, with yields higher by about 15 bp.
This also suggests little concern by the financial markets about recent events in the Middle East. Investors seem to expect that despite the resumption of hostilities, the U.S. and Iran will eventually and probably soon settle their differences.
July 17, 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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