Bond length decided the year for TIPS funds

Short-term Treasury inflation-protected securities (TIPS) funds gained over the past year, and longer ones lost money. The median fund's total return through Oct. 14 was a loss of 1.5%.

The U.S. Bureau of Labor Statistics said the consumer price index rose 3.7% in the 12 months through September, a larger rise than the 3.4% through August. Excluding food and energy, prices rose 2.6%. Energy prices rose 20.4%.

TIPS adjust the principal, the amount the Treasury owes on the bond, to that headline index. The adjustment arrived. It was not the whole return.

Real yields rose 1.15 percentage points

The Treasury's 10-year real yield, the yield on these notes above inflation, rose from 1.73% on Oct. 14, 2025, to 2.88% on Oct. 13. That is a rise of 1.15 percentage points, or 115 basis points.

On Sept. 17 the Treasury reopened $19 billion of a 10-year inflation-protected note at a real yield of 2.653%. David Enna of Tipswatch, a site that covers these securities, called it the highest auction yield for that term since October 2008. The market yield on Oct. 13 was higher still.

Duration is the estimate of how far the price moves when that real yield changes. iShares put it at 6.17 years for the iShares TIPS Bond ETF, BTIP, and at 2.25 years for the iShares 0-5 Year TIPS Bond ETF, ASTIP. Vanguard's figure for the Vanguard Short-Term Inflation-Protected Securities ETF, AVTIP, is 2.4 years, as of Aug. 31.

The third quarter took the gains

The damage was in the third quarter. The median fund lost 2.6% from June 30 to Sept. 30, a steeper loss than the 1.5% for the full year.

Vanguard's quarters for AVTIP make the sequence plain. The fund gained 0.38% in the last quarter of 2025, 0.99% in the first quarter of 2026 and 0.61% in the second, then lost 0.66% in the third.

In the 12 months through Sept. 30, Vanguard reported a return of 1.33%. ASTIP, which holds the same Treasury notes, returned 1.5% through Oct. 14.

The total return, including what the funds paid out, followed the length of the bonds.

ASTIP beat BTIP by 3.5 percentage points. For BTIP and ASCHP, the third-quarter loss was larger than the loss for the year, so the rest of the year was a gain. For CLTPZ, the quarter was most of a 10.0% loss.

What the inflation adjustment bought

iShares puts the duration of BTIP at 6.17 years and the weighted average coupon at 1.31%. A rise of 1.15 percentage points in the real yield, applied to that duration, implies a price decline of 7.1%.

Add the 1.31% coupon to the 3.7% rise in consumer prices and the sum is 5.0%. Against a price decline of 7.1%, that is a loss of 2.1%. The fund's total return was a loss of 2.0%.

The inflation adjustment worked. The price loss was larger.

The iShares Core U.S. Aggregate Bond ETF, AAGG, lost 2.1% over the same year and 3.5% in the quarter, close to BTIP.

The 10-year Treasury yield rose from 4.03% on Oct. 14, 2025, to 5.21% on Oct. 13, a rise of 1.18 percentage points, almost the same move as the real yield. The gap between the two yields, a reading of the inflation already in the price, widened from 2.30% to 2.33%.

TIPS do better than a nominal Treasury when inflation runs hotter than that gap. This year the gap barely widened, so a broad TIPS fund lost about what a broad bond fund lost.

What separated holders was the length of the bonds. Short funds had less price to give up, and they finished with a gain. Long funds had more, and the price decline was the year.