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After a period of relative calm, inflation-linked bonds have taken center stage again, capturing the attention of investors seeking protection and returns in a shifting economic environment.
In Q1 2025, net inflows into US TIPS-related ETFs surged to $4.7 billion, marking the largest quarterly inflow since late 2021. This wave of capital underscores the market’s growing appetite for assets that can safeguard purchasing power amid uncertain price dynamics.
Performance data further bolsters this trend. TIPS funds returned an average of 3.4% year-to-date in 2025, outperforming intermediate core bond funds at 2.7%, US corporate bond funds at 2.8%, and high-yield bonds at 1.8%. Only long-term bond funds, at 4.3%, slightly eclipsed TIPS on a return basis.
Specifically, Q1 2025 saw Treasury Inflation-Protected Securities deliver a +4.17% return, beating nominal Treasuries by 1.25% and corporate bonds by 1.8%. These figures highlight why asset managers and retail investors alike are repositioning portfolios to capture real yields.
Several factors are propelling investors back into inflation-linked debt:
In particular, fresh US tariffs on Canada and Mexico have reignited fears of imported inflation, while geopolitical frictions worldwide have underscored the need for assets that hedge price volatility.
The real yield curve steepened notably in Q1 2025, as shorter maturities saw sharper declines: 2-year real yields fell by 105 basis points, 5-year by 67 bps, and 10-year by 39 bps. Meanwhile, market-implied breakeven inflation rates for maturities under 10 years rose by over 20 bps.
This curve shift benefited active managers who embraced a steepening bias. Through careful security selection and curve positioning strategies, they captured additional returns, outpacing passive benchmarks.
Portfolio allocations have gravitated toward intermediate maturities, where real yields remain compelling and duration risk is manageable. As a result, many managers maintain a modest duration overweight, betting on the Fed’s prospective rate cuts.
The Federal Reserve is currently priced for three rate cuts in 2025—one more than previously expected. Fed fund futures increasingly reflect a scenario in which policy eases in response to slowing growth and stabilizing inflation.
Nevertheless, risks persist. Should inflation prove sticky or rebound due to renewed supply shocks or demand stimuli, the Fed may delay cuts. Conversely, an abrupt economic downturn could force deeper easing, affecting real yields across the curve.
Outside the US, eurozone inflation eased to 2.2% year-on-year, offering some respite to global markets. Meanwhile, a weaker US dollar in April marginally boosted returns for dollar-based holders of inflation-linked bonds, further sweetening the appeal of TIPS.
Investor sentiment has swung back in favor of inflation protection. Yet, several risks warrant close attention:
Active managers argue that selective security choices and nimble positioning can mitigate these risks, while passive investors may need to brace for earnings drag if real yields compress.
For those considering a stake in inflation-linked bonds, here are actionable insights:
Long-term investors should view inflation-linked bonds not merely as hedges but as potential return drivers within a balanced fixed-income sleeve. Real yields above historical averages create opportunities for income generation even in low-growth scenarios.
Mid-2025 has brought inflation-linked securities back into the limelight. Fueled by inflows, strong relative performance, and a complex macro backdrop, TIPS are proving their worth as versatile portfolio components.
Whether driven by fear of rising prices, a cautious outlook on economic growth, or the hunt for yield, investors are finding fresh reasons to embrace inflation-linked bonds. By understanding yield curve mechanics, policy trajectories, and risk factors, market participants can position themselves to capture both protection and performance in the years ahead.
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