Treasury Inflation-Protected Securities

17 September 2026, 22:33 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. Notably, the 10-year real yield on Treasury Inflation-Protected Securities (TIPS) rose above 2.5%, its highest level in almost 20 years. Meanwhile, inflation expectations, as measured by the gap between nominal Treasury yields and real yields, have been edging modestly higher. This has been driven in part by ongoing disruptions to energy markets, which have pushed Brent crude oil prices back above USD 100 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%.

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 among the few asset classes that tend to perform well during supply-side-driven oil shocks, as these shocks create a more stagflationary macroeconomic environment—i.e., downward pressure on economic growth and upward pressure on inflation. The exception is when there is an aggressive monetary policy response, as in 2022-23. To a large extent, it is this factor—the recent increase in hawkish Federal Reserve policy expectations—that has driven the recent rise in real yields and eroded the year-to-date gains in TIPS. While the delivery of a 25-basis-point hike in September, alongside more hawkish messaging, presents a near-term headwind to TIPS, valuations are now much more appealing, with an additional 75bps of rate hikes priced in and real yields at multi-decade highs across the curve.

On a relative basis, TIPS continue to outperform nominal Treasuries of similar duration this year. Ultimately, all else equal, TIPS outperform comparable nominal Treasuries over their holding period if CPI inflation averages above the market’s implied expectation. Right now, medium- to long-term breakeven inflation rates sit in a tight 2.25-2.5% range across the curve. The implication is that the market is anticipating disinflation from the latest CPI inflation rate of 3.4% y/y recorded in August. By comparison, core inflation, which strips out food and energy and may be a better signal of underlying inflation trends once the energy spike passes, is currently running at 2.4% y/y. Going forward, it will be important to assess the possibility of second-round inflationary effects from higher energy prices appearing in broader goods and services inflation and wage growth. The market is likely to closely scrutinize measures of company pricing power and surveyed consumer inflation expectations to assess the extent to which these higher input prices are passed on. Inflationary risks from tariffs or categories related to AI investment also warrant close attention in the coming months. A more prolonged inflationary impulse would support TIPS.

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

Treasury Inflation-Protected Securities

Another driver of performance is the evolution of risk premiums embedded in pricing, specifically liquidity and inflation risk premiums. Lower liquidity is a headwind for inflation-linked bonds relative to comparable nominal bonds because the latter are considered more liquid. This can be particularly relevant during periods of market stress and warrants consideration in the current highly uncertain market environment. However, inflation risk premiums could also reprice higher, supporting TIPS over a strategic investment horizon. A key factor investors must consider in this respect is the Fed’s commitment to its 2% target, with inflation now running above this level for more than five years. So far, the new Fed chair, Kevin Warsh, has emphasized a commitment to price stability and monetary policy…