How’s that allocation to bonds working out this year? Probably pretty good, if you favored Treasury Inflation Protected Securities (TIPS).

With less than four weeks left to the trading year, TIPS are on track to capture the lead for US bond-market performance in 2021, based on a set of ETFs through yesterday’s close (Dec. 6).

Short-term Treasury Inflation Protected Securities are currently in first place via iShares 0-5 Year TIPS Bond (STIP), which is ahead 5.2% year to date. As you might expect, the ride this year via STIP has been relatively smooth. Indeed, STIP’s ascent in 2021 has been a low-vol party as the ETF barely traded below its 50-day moving average this year.

This year’s second-place bond performer is only slightly behind STIP, but the ride has been far more rocky. The iShares TIPS Bond ETF (TIP) is up 5.0% in 2021, second only to STIP. But the path to that second-place performance has been considerably more volatile, thanks to a higher effective duration (a measure of interest-rate sensitivity) for the portfolio: roughly 7.7 vs. 2.6 for STIP, according to Morningstar.com.

Overall, there have been moderate headwinds for US bonds writ large. Only six of our 15-bucket definition of fixed income are currently posting gains this year. Several of the losers can blame longer duration as a risk factor that backfired. That includes the deepest shade of red in 2021 for the opportunity set via iShares 10-20 Year Treasury Bond (TLH), which is down 4.1% through yesterday’s close.

The US benchmark for fixed income — Vanguard Total Bond Market (BND) – is off 1.4% year to date.

Profiling all the funds listed above through a momentum lens (based on moving averages) reflects a weak trend of late. Notably, the short-term proxy for momentum has collapsed to the lowest reading since early 2018. Contrarians may find the reversal intriguing, but buying here is effectively a bet that interest rates will hold steady or fall. In turn, deciding if that’s a reasonable view or not requires a view on inflation, namely, predicting how soon will it ease?

Mohammed Kazmi, a portfolio manager at Union Bancaire Privée, is inclined to stay cautious. “Previously, central banks were using Covid concerns to remain dovish,” he tells the Financial Times. “But this time around we’ve reached the point on the inflation front, at least for the Fed, where they’re not going to do that any more.”

That’s a reasonable assumption, at least for the immediate future, based on Econoday.com’s consensus point forecast for this week’s November update on US consumer inflation (scheduled for release on Friday, Dec. 10). Economists are expecting headline CPI will continue to rise on a year-over-year basis, picking up to 6.8% — a 39-year high!

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