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Treasury Inflation-Protected Securities

Also called: TIPS

What are Treasury Inflation-Protected Securities, or TIPS?

Treasury Inflation-Protected Securities are U.S. Treasury bonds indexed to inflation. They are offered in maturities of five, 10, and 30 years and pay a fixed rate of interest every six months. Like traditional Treasury bonds, they are backed by the full faith and credit of the U.S. government (meaning there is little credit risk involved).

  • TIPS make interest payments every six months that vary along with inflation.
  • Buying TIPS directly when they are issued and holding them until maturity guarantees a positive real return.
  • Investing in TIPS mutual funds or exchange-traded funds offers the potential for better returns but comes with the risk of losses.

Unlike traditional bonds, TIPS' principal value will change, upward or downward, to keep pace with inflation as measured by the Consumer Price Index. When the CPI rises, the Treasury raises the principal value of all TIPS by that amount. Although the interest rate, or coupon, is fixed, the interest payments will vary along with the inflation-adjusted principal amount.

Buying individual TIPS directly from the Treasury is the most straightforward way to protect against inflation. Investors who purchase TIPs when they are issued and hold them until maturity are guaranteed a positive real return (that is, return adjusted for inflation). Upon maturity, owners receive the adjusted principal or the original principal, whichever is greater. (This provision protects the bond owner against deflation.)

Investing through a TIPS fund offers the potential for greater capital appreciation, but it also carries the risk of losses. TIPS funds don’t always move in lockstep with inflation because they don’t necessarily buy TIPS when they’re originally issued or hold them until maturity. TIPS’ market prices are influenced by interest rates, not just inflation. Investors in these funds may experience losses even when inflation increases, as was the case in 2022.