Understanding Inflation-Protected Securities (TIPS)

With inflation making headlines and eroding the purchasing power of consumers worldwide, investors are seeking tools to protect their real returns. Treasury Inflation-Protected Securities, or TIPS, offer one such tool by providing inflation-adjusted returns backed by the U.S. government.

What Are TIPS?

TIPS are a type of U.S. Treasury bond specifically designed to shield investors from inflation. The principal of a TIPS bond increases with inflation and decreases with deflation, based on changes in the Consumer Price Index (CPI). Interest is paid twice a year and is calculated on the adjusted principal, which means that interest payments rise with inflation as well.

How TIPS Work

Unlike conventional bonds, which pay a fixed interest on a fixed principal, TIPS adjust the principal to keep up with inflation. This protects the investor’s purchasing power and ensures a real return above inflation. When a TIPS matures, you are paid the adjusted principal or original principal—whichever is greater.

TIPS are not about yield maximization, but about protecting value over time.

For example, if you own $1,000 in TIPS and inflation rises by 3%, your principal increases to $1,030. If your coupon rate is 1%, you now receive interest on $1,030 instead of the original $1,000.

When to Invest in TIPS

TIPS are most useful in periods of rising inflation expectations. They can serve as a stabilizer in diversified portfolios, especially for retirees and conservative investors who want to maintain purchasing power. However, TIPS may underperform in deflationary environments or when inflation is lower than expected.

• Great for conservative or income-focused investors
• Useful for long-term retirement planning
• Underperform during low or negative inflation periods

How to Buy TIPS

TIPS can be purchased directly through TreasuryDirect.gov or indirectly via mutual funds and ETFs like the iShares TIPS Bond ETF (TIP). Buying through funds offers better liquidity and diversification, though fees and tracking differences may apply.

Final Thoughts

TIPS are not a silver bullet but are a valuable component of a well-diversified portfolio. Their real return promise and government backing make them a reliable hedge against inflation, especially in uncertain economic times.