Key Takeaways
- TIPS funds have on average returned 3.4% in 2025, making it one of the best-performing bond fund categories.
- Fears of economic slowdown have lifted bond prices.
- Inflation expectations have risen in part due to concerns about the impact of tariffs.
With investors worried about the outlook for inflation and a softening economy, funds focused on Treasury Inflation-Protected Securities have been among the best-performing bond funds in 2025.
Inflation worries have been building since the November US presidential election. In recent months, the significant decline in inflation seen in 2023 and for most of 2024 slowed to a crawl. With President Donald Trump launching what’s shaping up to be a trade war with Canada and Mexico, the tariffs he’s imposed are seen by many analysts as risking a return to higher inflation and softer economic growth.
TIPS in turn have benefited from data suggesting the slowing economy is slowing and from rising short-term inflation expectations. These funds are up 3.4% in the year to date, ahead of the 2.7% gain on intermediate core bond funds, the largest bond fund category, . TIPS are also ahead of US corporate bond funds, which are posting an average return of 2.8%, and high-yield bonds, which are up 1.8%. The only major bond fund category with stronger year-to-date returns is long-term bond funds, which are up 4.3% on average.
The largest TIPS fund, the $55 billion Vanguard Short-Term Inflation-Protected Securities Index Fund VTIP, has returned 2.2% in 2025 after bringing in 6.6% in 2024, when shorter-term funds excelled. The second-largest, the $26 billion Vanguard Inflation-Protected Securities Fund VIPIX, has returned 3.4% year-to-date, as longer-term funds have benefited more from falling yields. To see more about how the largest TIPS funds have performed, see the table at the end of this article.
What Are TIPS?
TIPS are a type of Treasury bond designed to guard against inflation. They offer coupon payments and a value at maturity that change along with the Consumer Price Index.
“There are two components to TIPS performance,” explains David Rogal, head of inflation-linked portfolios at BlackRock and a portfolio manager of the $20 billion BlackRock Total Return Fund MPHQX. One is their duration, meaning their sensitivity to moves in interest rates, and the other is their hedge against inflation, which rises and falls in value with inflation expectations.
Comparing the difference in yields between TIPS and regular Treasury bonds of the same maturity roughly reflects what the market expects inflation to be over that period. Investors will pay more or less for TIPS depending on their inflation expectations. The level of inflation at which TIPS will return the same as a Treasury maturing at the same time is called the “breakeven rate.”
For example, the rise in inflation expectations can be seen in the five-year breakeven inflation rate. At the time of the November election, the five-year breakeven rate stood at 2.3%. That held relatively steady through January but spiked to 2.66% in February. As of the close of trading Monday, the five-year breakeven rate stood at 2.59%.
“Most of the move [in breakeven rates] has been on the shorter end,” says Rob Walder, chief fixed income strategist and head of macro research at Invesco. He points out that longer-term breakeven rates have stayed steady by comparison.
Stagflation Worries Benefit TIPS
Trump administration policies, especially tariffs, have been the major cause of these economic fears, as the threat of stagflation (combined economic weakness and inflation) rears its head.
Fears of slowing growth have driven bond yields down across the board. “If you think the economy is slowing down, you’re selling riskier assets to buy safer assets,” says Dominic Pappalardo, chief multi-asset strategist at Morningstar. “That puts downward pressure on Treasury rates, particularly in the long term.”
Falling yields help longer-term bonds more, as they are more sensitive to rate moves. This has also helped TIPS funds, as the TIPS market tends toward longer-term bonds, Rogal explains. He notes that the average maturity of TIPS funds is a bit over seven years.
Shorter-term TIPS funds, while benefiting less from falling yields, have significantly outperformed other shorter-term bonds. The average year-to-date return for funds in the Morningstar’s short-term bond category is 1.4%, compared with 2.3% for funds in the short-term inflation-protected bonds category.
The Root Cause: Policy
Looking ahead, a key variable will be whether tariffs stay in effect long enough to cause a lasting rise in inflation and damage the economy. The rise in inflation expectations over the shorter term indicates investors think they won’t cause longer-term price rises.
“Nearly all of the new administration’s policies are likely to increase inflation in the short term,” says Pappalardo. He adds that he’d attribute about 80% of the rise in inflation expectations to worries about policy. He also points out that Trump’s economic policies may dampen economic growth through multiple avenues, such as tariffs slowing trade and uncertainty about the new administration’s policies. These factors combine to boost bond prices in general and TIPS in particular. “TIPs should do better in stagflation,” says Pappalardo.
