Table depicting an inflation market update. The front end of the breakeven curve fell more sharply, reflecting lower energy prices and realized inflation below expectations.
Highlights
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Ignoring gravity
Elevated policy uncertainty and falling sentiment did not foretell a favorable outcome for the U.S. economy heading into 2025. The gravity of domestic shifts, their geopolitical impact, and institutional frictions were expected to weigh on both financial markets and economic activity. Yet these forces were ignored. Instead, economic growth remained firm, financial conditions eased, and both credit and equity markets rallied through much of the year.
While concerns about inflation persistence, Federal Reserve (Fed) independence, and institutional stability continued to surface, investors stayed confident in the economy’s ability to absorb shocks without derailing growth. Against this backdrop, Treasury Inflation-Protected Securities (TIPS) performance was driven less by inflation expectations and more by movements in real yields and policy expectations.
Market update
In the fourth quarter of 2025, the 10-year real yield increased 12 basis points (bps)1 while shorter maturities increased 16 to 17 bps. For the year, the real yield curve steepened as two- and five-year real yields decreased a little more than 50 bps, while the 10-year real yield decreased 32 bps. Expectations of easier monetary conditions lowered shorter-maturity yields, while longer-dated real yields were more influenced by supply dynamics and term premia considerations.
Market-implied inflation expectations – breakevens – fell in 2025. The larger drop of shorter-maturity breakevens reflected lower energy prices and realized inflation below consensus (see Exhibit I).
TIPS returned 2.10% in the fourth quarter of 2025, bringing year-to-date total returns to 7.01%, ahead of nominal Treasuries by 0.67%. Robust returns and lingering inflation uncertainty kept net flows into TIPS-related exchange-traded funds (ETFs) positive throughout 2025, reaching $14.4 billion, or approximately $1.2 billion per month on average.
The Fed lowered the policy rate by a cumulative 75 bps in 2025, with three consecutive cuts since September. Tension between the White House and the Fed added concerns around future leadership and governance, intensifying debates over the inflationary risks of more aggressive easing versus the desire to support labor market conditions. By year-end, investors in fed funds futures priced 60 bps of policy rate cuts in 2026.
Performance and positioning
First, a note on end-of-year pricing. A timing mismatch on December 31, 2025, detracted 14 to 15 bps from relative performance. The Bloomberg U.S. TIPS Index, the benchmark, priced at 1 p.m. EST, while portfolios were priced at the 2 p.m. EST market close. During the final trading hour, bond yields rose by more than 2 bps. As a result, portfolios finished the year 3-to-4 bps ahead of the benchmark; adjusted for this timing difference, excess return was approximately 20 bps.
The TIPS universe of investable securities is comprised of TIPS maturing in less than one year, together with dozens of securities in the benchmark. In Exhibit II(a), our expected returns framework illustrates roll-down opportunities in the intermediate part of the real yield curve.
Chart depicting TIPS’ expected returns framework, which illustrates roll-down opportunities in the intermediate part of the real yield curve.
Table depicting the portfolio’s term structure vs. the benchmark, with a steepening bias that favors intermediate maturities over the longer end of the real yield curve, along with a slight duration overweight relative to the benchmark.
The positions that implement our strategies resulted in the term structure allocation described in Exhibit II(b), emphasizing intermediate maturities, along with a slight duration overweight relative to the benchmark.
Macroeconomic conditions and policy
The U.S. economy expanded at an annualized rate of 4.31% in the third quarter, an upside surprise driven by solid consumer spending and increased artificial intelligence (AI)-related investment. Although the government shutdown weighed on fourth quarter activity, consensus forecasts for full-year 2025 growth remain above 2.0%. Looking ahead to 2026, easier financial conditions and expected fiscal stimulus are expected to support continued economic growth.
The 43-day government shutdown, the longest on record, delayed the publication of labor market data and canceled the October Consumer Price Index (CPI) report. Data collection for November inflation also occurred off schedule and coincided with seasonal retail discounts, adding noise to official statistics.
As data resumed, labor market conditions showed moderation. The U.S. economy added fewer than 600,000 jobs in 2025, the lowest annual increase since 2020. Moreover, only a small fraction of the 180,000 federal jobs affected by the shutdown returned in subsequent months. The unemployment rate remained low by historical standards, standing at 4.4% as of December.
The absence of October CPI data required TIPS accruals to use the trailing 12-month average inflation rate ending September 2025 as a proxy, a fallback method recommended by the Treasury. The year closed with annual headline CPI inflation at 2.7% and core CPI at 2.6%, both below prior levels. Core services continues to be the main driver of inflation, as shown in Exhibit III.
Chart depicting annual headline CPI inflation and core CPI. The latest data points are 2.7% and 2.6%, respectively, as of December 31, 2025.
Monetary policy remained a central topic. The administration signaled a preference for lower interest rates, and following the resignation of Adriana Kugler, Stephen Miran was appointed to the Board of Governors in September. Since his appointment, Miran dissented at each Federal Open Market Committee (FOMC) meeting in favor of a more aggressive easing path. Other voting members maintained a more cautious stance, keeping inflation risks in focus even as the Fed’s attention shifted toward maximum employment. This divergence of views resulted in three dissents at the December meeting, a level not seen since 2019 (see Exhibit IV).
Chart depicting the number of FOMC dissents from January 1, 2021, through their December 10, 2025, meeting.
Jerome Powell’s term as Chair ends in May 2026, and the White House is expected to nominate a successor early in the year. While Powell could remain on the Board through 2028, tradition suggests he will step down at the end of his chairmanship, opening an additional seat. Separately, the Supreme Court is scheduled to hear arguments related to efforts to remove Governor Lisa Cook from the Board. A ruling in favor of the administration would expand executive influence over monetary policy. We expect Fed independence to be a focal point in 2026.
Conclusion
The year underscored the importance of institutions in the conduct of economic policy. Stable and well-anchored inflation expectations reflected not only progress on inflation but also the Fed’s credibility. As attention turns toward policy easing in 2026, inflation risks remain present, even if they are not apparent in headline data. In this sense, the market’s tendency to ignore gravity may prove temporary. TIPS address this asymmetry with discipline: They benefit from positive real yields while providing protection should inflation expectations reprice in response to easing, policy uncertainty, or shifts in institutional credibility.
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| Performance As of December 31, 2025 |
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|---|---|---|---|---|---|---|---|
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Total Returns |
Average Annual Total Returns |
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Composite/Benchmark |
3 Mo. |
YTD |
1 Yr. |
3 Yr. |
5 Yr. |
10 Yr. | Since Inception |
BBH Inflation-Indexed Securities Composite - gross of fees |
0.01% |
7.03% |
7.03% |
4.17% |
1.11% |
3.10% |
5.04% |
BBH Inflation-Indexed Securities Composite - net of fees |
-0.03% |
6.87% |
6.87% |
4.02% |
0.96% |
2.94% |
4.89% |
Bloomberg U.S. TIPS Index |
0.13% |
7.01% |
7.01% |
4.22% |
1.12% |
3.08% |
4.73% |
Returns of less than one year are not annualized. The Inflation-Indexed Fixed Income Composite inception date is 04/01/1997. |
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Past performance does not guarantee future results. Source: BBH & Co. and Bloomberg |
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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-17811-2026-01-14 Exp. Date 04/30/2026
