Chart depicting the frequency of monthly changes in the 10-year real yield from 1997 through September 30, 2026. September 2026 delivered 49 bps of the quarterly change, greater than 97% of all monthly changes since the inception of the TIPS market in 1997.
Highlights
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Unsettled
The Memorandum of Understanding (MOU) signed between the United States and Iran on June 18 was expected to settle disputes and reopen the Strait of Hormuz. Early in third quarter 2026, that expectation was realized as oil prices dropped below $70. But reality became unsettled when negotiations over the terms of reopening stalled and attacks on shipping resumed. By late July, strait transit remained a fraction of pre-conflict levels and oil prices exceeded $90 per barrel.
The Federal Reserve (Fed) responded. After three dissents in favor of a rate increase in July, the Federal Open Market Committee (FOMC) voted unanimously in September to raise the policy rate by 25 basis points (bps)1 to 4.0%. Chair Kevin Warsh thus brought the first hike since 2023, addressing accelerating inflation through policy rather than patience.
Market update
In third quarter 2026, the 10-year real yield increased 69 bps to 2.91%, its highest level since 2008. September delivered 49 bps of the quarterly change, greater than 97% of all monthly changes since the inception of the TIPS market in 1997 (see Exhibit I). The rest of the real yield curve increased as well: For the quarter, the two-year real yield rose 18 bps, the five-year 75 bps, and the 30-year 55 bps. The steepening around shorter maturities normalized the shape of the real yield curve, with the two-year yield now 35 bps below the five-year, compared with 22 bps above it on June 30 (see Exhibit II).
Market-implied inflation expectations - breakevens - rose most at the front end of the curve. The two-year rate rose 54 bps to 2.54%, reversing part of second quarter 2026’s decline as energy prices climbed back. The move across longer maturities was more modest. The inverted curve is consistent with investors expecting energy prices to lift inflation over the next two years while the Fed keeps longer-run expectations anchored (see Exhibit II).
Exhibit II shows real yields drove most of the rise in nominal Treasury yields, which equal real yields plus breakevens. Different factors have weighed on different parts of the curve. At the front end, the closure of the Strait of Hormuz and the resulting jump in energy prices have led markets to expect a more hawkish Fed, raising expected policy rates. In the intermediate segment, debt-financed AI infrastructure capital spending has lifted real growth and is expected to raise productivity further, pushing up real yields. At the long end, a budget deficit around 6% of Gross Domestic Product (GDP), together with projections of heavy debt issuance, has led investors to question the sustainability of U.S. fiscal policy, demanding a higher term premium.
Table depicting the real yields and breakevens across two-, five-, 10-, and 30-year maturities quarter- and year to date. Breakevens rose most at the front end of the curve; for the quarter, the two-year real yield rose 18 bps, the five-year 75 bps, and the 30-year 55 bps.
TIPS returned -3.24% in third quarter 2026, bringing year-to-date total returns to -2.12%. For the year, TIPS are now ahead of nominal Treasuries by 65 bps and ahead of the Bloomberg U.S. Aggregate Index by 79 bps. An increase in inflation expectations and strong inflation accruals contributed to TIPS outperformance over nominal Treasuries. Net flows into TIPS-related exchange-traded funds (ETFs) remained positive at approximately $4.8 billion over the quarter, bringing year-to-date inflows to about $14 billion.
Performance and positioning
The BBH Inflation-Indexed Fixed Income Composite returned -3.34% (gross) in third quarter 2026, bringing year-to-date performance to 3 bps ahead of the benchmark. Our duration and curve positions detracted from performance as intermediate maturity real yields increased the most.
Our universe of investable securities is comprised of TIPS maturing in less than one year, combined with dozens of securities in the benchmark. In Exhibit III(a), our expected returns framework illustrates roll-down opportunities in the intermediate part of the real yield curve. With the front end now sloping upward, intermediate maturities offer higher real yields and improved roll-down opportunities.
Chart depicting the portfolio’s expected returns framework. There are roll-down opportunities in the intermediate part of the real yield curve.
Chart depicting the portfolio’s term structure vs. the benchmark. The overweight in the intermediate part of the curve is offset by underweights at the short and long ends.
We remain overweight duration in the intermediate part of the real yield curve, but we brought overall portfolio duration to almost neutral relative to the benchmark. The overweight in the intermediate part of the curve is offset by underweights at the short and long ends, as shown in Exhibit III(b).
Macroeconomic conditions and policy
The U.S. economy remains on solid footing. Real GDP grew at an annualized rate of 2.2% in second quarter 2026, revised up by 0.7% on stronger investments, consumer spending, and government spending. Real-time activity trackers, such as the Fed of New York’s GDP nowcast, have third-quarter growth of around 2.3%.
Nonfarm payrolls increased by 29,000 in September, below consensus by about 60,000 jobs, and substantially below August’s 162,000. The unemployment rate ticked up to 4.2% as the labor force participation increased to 61.6%.
Headline inflation, measured by the annual change in Consumer Price Index (CPI), stood at 3.7% in September. Energy prices increased 10.3% in the quarter, with gasoline alone accounting for more than a half of September’s 0.6% monthly increase. Core CPI rose 2.6% over the same period. The gap suggests that the energy shock has thus far raised the price level without broad pass-through to underlying inflation (see Exhibit IV).
Chart depicting annual inflation from September 2021 through September 30, 2026. Core CPI rose 2.6% in September.
The Federal Open Market Committee (FOMC) held the policy rate at 3.50%-3.75% in July, but three voting members dissented in favor of a 25-bp increase. In September, the FOMC raised the target range to 3.75%-4.00% unanimously, the first increase since 2023. Chair Warsh said inflation had been too high for too long and that the FOMC was not yet confident it had moved to target at sufficient speed.
The Summary of Economic Projections (SEP) depicts a more bullish Fed and points to further tightening. The median participant expects the policy rate to end 2026 at 4.1%, consistent with one more 25-bp increase, and to hold there through 2027. Median inflation, measured by the personal consumption expenditures (PCE) price index, is projected at 3.7% for 2026, falling to 2.3% in 2027.
Conclusion
The MOU signed around the end of the second quarter did not settle markets as expected ahead of third quarter 2026. The Strait of Hormuz remained closed, energy prices climbed back, and headline inflation stayed above 3%. Furthermore, the Fed hiked the policy rate for the first time since 2023 and signaled more hikes may be on the way.
For TIPS investors, there are important takeaways: (1) Higher energy prices have not yet become an underlying inflation problem, as evidenced by a lower core inflation level; (2) breakevens continue to price inflation below current actual inflation run rates; (3) the Fed has strengthened its credibility with its willingness to tighten into a supply shock, even though it raises real yields along the way; and (4) with the 10-year real yield at 2.91% - levels not seen since 2008 - TIPS offer attractive opportunities to earn income protected from inflationary risks of an unsettled world.
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| Performance As of September 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 | -3.34% | -2.09% | -2.09% | 3.76% | 0.00% | 2.14% | 4.84% |
| BBH Inflation-Indexed Securities Composite - net of fees | -3.38% | -2.20% | -2.24% | 3.61% | -0.15% | 1.98% | 4.68% |
| Bloomberg U.S. TIPS Index | -3.24% | -2.12% | -1.99% | 3.75% | 0.00% | 2.15% | 4.53% |
| 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 equals 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-19287-2026-10-12 Exp. Date 01/31/2027
