Treasury Inflation-Protected Securities

20 August 2026, 21:15 UTC Chief Investment Office GWM Investment Research

Treasury Inflation-Protected Securities CIO View: Treasury Inflation-Protected Securities Tom Nash, Strategist, UBS AG Frederick Mellors, Strategist, UBS Switzerland AG

Global Asset Class Preference Nominal US Treasury yields moved higher over the past month, driven Neutral primarily by rising real yields. The Fed kept rates unchanged at 3.50-3.75% at its July meeting, but stuck to a hawkish bias with three members in favor of a 25bps rate hike. Additionally, new Fed Chair Warsh provided little clarity around the future policy path as the market continues to adjust to his communication style. These factors triggered a steepening of the Treasury yield curve. The front end has remained relatively stable compared to the back end given softer-than-expected payrolls, CPI, and retail sales data throughout August. This prompted markets to push back expectations for the next rate hike until later in the year. However, the resulting decline in yields was modest. By contrast, the long end was pressured by higher- for-longer inflation expectations, ongoing fiscal concerns and increasing AI-related duration supply in addition to sovereign supply, with US 30- year Treasury yields reaching 5.34%, its highest level since 2007. Given the magnitude of the move and the fact that stable and lower long-end rates has been a communicated policy priority for the US administration, the Treasury announced a doubling of its long-end bond buyback operations. The move triggered a rally in government bonds, with the 30-year yield falling nearly 10 basis points on 19 August.

Inflation expectations, as measured by the gap between nominal Treasury yields and real yields, have edged higher in recent weeks. This has been driven in part by renewed concerns over Middle East tensions and the absence of meaningful progress in discussions between the US and Iran, which have pushed Brent crude oil prices back to over USD 90 per barrel from approximately USD 75 earlier in August. However, 10-year breakeven inflation rates remain well below the peaks reached in May, when they briefly exceeded 2.5%, and currently stand at around 2.3%. At these levels, TIPS would outperform comparable nominal Treasuries over their holding period if inflation ultimately averages above the market's implied expectation. Despite the recent increase in real yields, intermediate- maturity TIPS have continued to deliver positive total returns year to date, outperforming nominal Treasuries of similar duration.

For the asset class, the ideal environment from a performance perspective is one in which real yields are falling, and inflation expectations are rising. This means that TIPS are one of only a few asset classes that tend to do well in supply-side-driven oil shocks, as this results in a more stagflationary macro environment—i.e., downward pressure on growth and upward pressure on inflation. A notable exception to this rule was following the start of the Russia-Ukraine war in 2022. However, we do not believe this parallel is appropriate given the very different starting conditions. Global economic activity was starting to recover strongly in 2022 after the pandemic against a backdrop of historically low policy rates—the fed funds rate was 0.25% compared to 3.625% today—and very negative real yields across the curve. Since real yields are now comfortably positive across the curve—at near

This report has been prepared by UBS Switzerland AG. Please see important disclaimers and disclosures that begin on page 3.

Treasury Inflation-Protected Securities

multi-decade highs for longer maturities—the valuation case for TIPS is now much more appealing, in our view.

Inflation-linked bonds have benefited from high carry in recent months. This is due to a significant increase in gasoline prices and energy-sensitive components of the inflation basket, which saw the reference consumer price index for TIPS increase by a hefty 2.5% (not annualized) over the course of March to May. This tailwind for the asset class is set to temporarily go into reverse, in our view, as the sharp fall in energy prices drove headline CPI to -0.4% m/m in…