Table depicting two-, five-, 10-, and 30-year real yields and breakevens and quarter-to-date change in basis points. Two- and 10-year real yields rose during the quarter, while breakevens fell across the curve, especially at the front end.
Highlights
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Resolution
As second quarter 2026 began, crude oil was above $100 per barrel, the labor market had no clear direction, and the Federal Reserve (Fed) navigated the dual challenge of above-target inflation and softening employment. The Iran conflict proved more durable than hoped. Successive and contradictory reports of diplomatic breakthroughs generated a pattern of risk-on, risk-off oscillations that kept short-term inflation expectations elevated.
The resolution arrived in mid-June with the signing of a Memorandum of Understanding (MOU) between the U.S. and Iran. The unwinding was rapid: Energy prices dropped in the final weeks of the quarter. Two-year breakevens fell 49 basis points (bps)1 over the quarter, reflecting the reversal of the energy shock rather than a fundamental shift in underlying inflation.
Simultaneously, the Fed underwent its most significant leadership transition in two decades. Kevin Warsh was confirmed as Chair and presided over his first Federal Open Market Committee (FOMC) meeting in late June. His approach to that meeting departed from recent precedent, and he signaled potential institutional changes.
Market update
The continuation of the conflict in the Middle East affected inflation markets. For the quarter, two-year real yields rose 87 bps, inverting the slope of the front of the real yield curve. The 10-year real yield ended the quarter at 2.24%, up 21 bps from March 31.
Market-implied inflation expectations - breakevens - fell across the curve, especially at the front end. Two-year breakevens fell 49 bps to 2.25%, while longer maturities were little changed. The 10-year breakeven declined 6 bps to 2.23%. The pattern is consistent with a transitory energy shock: investors expect higher near-term inflation to dissipate, with longer-run price stability almost intact (see Exhibit I).
Treasury Inflation-Protected Securities (TIPS) returned 0.89% in second quarter 2026, outperforming nominal Treasuries by 0.57%. Although breakevens declined, TIPS outperformed nominal Treasuries given strong inflation accruals that resulted from surging inflation. Net flows into TIPS-related exchange-traded funds reached $8.6 billion, lifting year-to-date net inflows to $14 billion. Lingering uncertainty over the inflation outlook, even as energy prices retreated, supported the asset class.
Performance and positioning
Our TIPS portfolios returned 0.84% in second quarter 2026, bringing year-to-date performance to 1.3%, ahead of the Bloomberg U.S. TIPS Index by +15 bps. The primary detractor was duration: The portfolio carried a slight overweight of approximately 0.2 years relative to the benchmark, which cost performance as real yields rose across the curve. Curve positioning in intermediate maturities offset some of the duration drag, as the intermediate part of the real yield curve outperformed the overall index on a total return basis.
Term structure positioning remained unchanged from first quarter 2026. Our expected returns framework continues to identify roll-down opportunities in the intermediate part of the real yield curve, and the portfolio maintained its emphasis on securities in the five- to 10-year maturity range. Following the Iran-driven repricing, intermediate maturities offer both attractive real yields and favorable roll-down heading into third quarter 2026. Note that the curve inversion turned roll-down negative for securities shorter than five years of maturity.
Chart depicting the expected returns and holdings framework, which identifies roll-down opportunities in the intermediate part of the real yield curve.
Table depicting the portfolio’s term structure vs. the benchmark. Throughout the quarter, term structure positioning remained unchanged from first quarter 2026.
Macroeconomic conditions and policy
The U.S. economy entered second quarter 2026 with growth expectations around 2%. Elevated energy prices kept headline inflation above the Fed’s target. The labor market, which had been the principal source of concern throughout 2025 and into 2026, delivered a notable upside surprise in May.
Headline CPI reached 3.5% year over year as of June, down from 4.2% in May as energy prices fell. Core CPI dropped to 2.6%, following a surprise on the downside in core services. While underlying inflation has not re-accelerated, the headline figure remains uncomfortably above the Fed’s 2% target, complicating the case for policy easing. (See Exhibit III.)
Chart depicting inflation across core services, core goods, core CPI, and headline CPI. Headline CPI reached 3.5% year over year, while Core dropped to 2.6%.
The U.S. economy added 334,000 jobs in second quarter 2026, about 116,000 more than in the previous quarter. Furthermore, the labor market stabilized relative to most of 2025 and early 2026, when economic policy uncertainty caused large fluctuations in nonfarm payroll. The 12-month average change in nonfarm payroll bottomed in February, but it would be premature to assume that labor market softness has passed. The unemployment rate edged lower but, as in prior quarters, the decline reflects a reduction in labor force participation rather than a broad-based improvement in employment conditions. (See Exhibit IV.)
Chart depicting the monthly change and the 12-month moving average in the labor market from April 1, 2024, through June 1, 2026. The 12-month average change in nonfarm payroll bottomed in February.
Kevin Warsh became the chairman of the Fed in May. His first FOMC meeting, held in late June, was notable in some respects. The policy rate was held steady in the 3.50% to 3.75% range, with the committee opting to wait for clarity on both the inflation and geopolitical fronts before modifying the current hold stance. Warsh reiterated the Fed’s commitment to price stability enough times that investors adjusted their expected hikes to two following the FOMC meeting.
Warsh’s approach to Fed communication stood out. The post-meeting statement was much shorter than its recent predecessors, reflecting his stated intention to simplify and clarify the Fed’s public communications. In a further departure from convention, Warsh did not submit a rate projection for the Summary of Economic Projections (SEP), citing a preference to assess the institution’s frameworks before staking out a personal rate path.
Warsh announced five internal task forces to conduct comprehensive reviews of: (1) Fed communications, (2) the balance sheet, (3) data sources and methodologies, (4) productivity, and (5) inflation. The breadth and ambition of these reviews suggest that institutional change at the Fed may prove as consequential for fixed income markets in 2026 as the geopolitical developments that preceded his tenure. Investors will watch the outputs of these task forces closely, as they bear on the Fed’s inflation framework and forward guidance practices.
Conclusion
Second quarter 2026 illustrated both the power and the limits of geopolitical shocks in shaping inflation dynamics. The Iran conflict lifted short-term inflation expectations; its resolution brought them back down almost as quickly. But the broader environment of elevated policy uncertainty and institutional transition that has characterized markets since 2025 did not revert.
The five task forces announced by Chair Warsh raise important questions about the future conduct of monetary policy - questions that are unlikely to be resolved within a single quarter. In this environment, TIPS continue to offer a disciplined combination of real income and inflation protection. With the 10-year real yield at almost 2.2% and the curve offering roll-down return opportunities in intermediate maturities, the case for inflation-linked fixed income remains compelling as investors navigate persistent uncertainty about the future inflation regime.
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| Performance As of June 30, 2026 | |||||||
|---|---|---|---|---|---|---|---|
| Total Returns | Average Annual Total Returns | ||||||
| Composite/Benchmark | 3 Mo. | YTD | 1 Yr. | 3 Yr. | 5 Yr. | 10 Yr. | Since Inception |
| BBH Inflation-Indexed Securities Composite - gross of fees | 0.84% | 1.29% | 3.39% | 3.99% | 0.98% | 2.58% | 5.00% |
| BBH Inflation-Indexed Securities Composite - net of fees | 0.80% | 1.21% | 3.23% | 3.83% | 0.83% | 2.43% | 4.84% |
| Bloomberg U.S. TIPS Index | 0.89% | 1.15% | 3.42% | 3.98% | 1.01% | 2.58% | 4.69% |
| Returns of less than one year are not annualized. The Inflation-Indexed Fixed Income Composite inception date is 04/01/1997. | |||||||
| Past performance does not guarantee future results. Sources: BBH & Co. and Bloomberg | |||||||
1 One basis point is equal to 0.01%.
RISKS
The value of the portfolio can be affected by changes in interest rates, general market conditions and other political, social and economic developments. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market.
Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, maturity, call and inflation risk; investments may be worth more or less than the original cost when redeemed. Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices.
Foreign investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards.
The Strategy may also invest in derivative instruments, investments whose values depend on the performance of the underlying security, assets, interest rate, index or currency and entail potentially higher volatility and risk of loss compared to traditional bond investments.
Holdings are subject to change. Totals may not sum due to rounding.
The Bloomberg U.S. TIPS Index includes all publicly issued, U.S. Treasury inflation-protected securities that have at least one year remaining to maturity, are rated investment grade, and have $250 million or more of outstanding face value. The index is not available for direct investment.
“Bloomberg®” and the Bloomberg indexes are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the indexes (collectively, “Bloomberg”) and have been licensed for use for certain purposes by Brown Brothers Harriman & Co (BBH). Bloomberg is not affiliated with BBH, and Bloomberg does not approve, endorse, review, or recommend the BBH Strategy. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to the strategy.
Effective duration is a measure of the portfolio’s return sensitivity to changes in interest rates.
Credits: Obligations such as bonds, notes, loans, leases and other forms of indebtedness, except for Cash and Cash Equivalents, issued by obligors other than the U.S. Government and its agencies, totaled at the level of the ultimate obligor or guarantor of the Obligation.
One basis point or bp is 1/100th of a percent (0.01% or 0.0001).
Holdings and attribution information is of a single representative account (“Representative Account”) that invests in the strategy. It is managed with the same investment objectives and employs substantially the same investment philosophy and processes as the Inflation-Indexed Fixed Income Strategy.
Brown Brothers Harriman Investment Management (“IM”), a division of Brown Brothers Harriman & Co (“BBH”), claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.
To receive additional information regarding IM, including a GIPS Composite Report for the strategy, contact John W. Ackler at 212 493-8247 or via email at john.ackler@bbh.com.
Gross of fee performance results for this composite do not reflect the deduction of investment advisory fees. Net of fees performance results reflect the deduction of the maximum investment advisory fees. Returns include all dividends and interest, other income, realized and unrealized gain, are net of all brokerage commissions, execution costs, and without provision for federal or state income taxes. Results will vary among client accounts. Performance calculated in U.S. dollars.
The objective of our Inflation-Indexed Fixed Income Strategy is to deliver excellent returns in excess of industry benchmarks through market cycles. The Composite included all fully discretionary, fee-paying domestic accounts over $10 million with an emphasis on U.S. inflation indexed securities. May invest up to approximately 25% outside of U.S. inflation indexed securities, and a duration of approximately 7-9 years. Accounts that subsequently fall below $9.25 million are excluded from the Composite.
There is no assurance the investment objectives will be achieved.
Brown Brothers Harriman & Co. (“BBH”) may be used to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries. This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference s tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners. © Brown Brothers Harriman & Co. 2026. All rights reserved.
NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE
IM-18842-2026-07-16 Exp. Date 10/31/2026
