TIPS vs. Treasuries vs. Total Bond Funds, Historical Performance 2008-2023

I hold close to 50/50 US Treasuries and TIPS for the bond portion of my portfolio. This is an area where my portfolio differs significantly from most “model portfolios” you’ll find from the major fund companies and robo-advisors. While buying more TIPS recently due to their historically high real yields, I decided to run a quick backtest comparing three intermediate-term fund options:

• Vanguard Inflation-Protected Securities Fund (VIPSX)
• Vanguard Intermediate-Term Treasury Fund (VFITX)
• Vanguard Total Bond ETF (BND)

Basically, an intermediate-term fund of TIPS, US Treasuries, or the Total Bond Index that tracks all investment-grade taxable bonds. You will get different results based on the timeframe, but I decided to look back through roughly the last 15 years.

Here is the real yield for 5-year TIPS during the that time period (2008-2023). While there was a brief spike during the 2008 financial crisis, I would guesstimate the average real yield during this entire period as… zero.

Here is the growth of a $10,000 investment starting in January 2008 through September 2023 via Portfolio Visualizer:

Nobody who held bonds over this time period is celebrating in hindsight, but I’m only comparing these three against each other. There is no clear, dominant winner. Visually, sometimes one would be winning slightly, and then another would be winning slightly. If I changed the start and end dates, the winner may be different each time.

However, I would also note that there was no extended bout of high inflation either. Given our current monetary system, high inflation is much more likely than deflation. Historically, high inflation is much more common as well. My opinion is that TIPS offers an insurance component against unexpectedly high inflation, and it appears that even during a period of “normal” to “low” inflation where it only offered a zero real yield, TIPS didn’t really “cost” me anything to hold. Total bond funds usually yield more since they contain corporate bonds, yet TIPS and Treasuries both still kept up.

If you stretch the time period back to 2000, when TIPS offered a higher real yield, you can see it actually did even better on a relative basis. I’m not saying that this will happen again in the future now with high real yields again, but overall I remain satisfied with holding 50/50 TIPS/Treasuries for my bond holdings. I continue to view owning some TIPS as low-cost insurance against unexpectedly high inflation.