Treasury Inflation-Protected Security (TIPS)
What Is a Treasury Inflation-Protected Security (TIPS)?
A Treasury Inflation-Protected Security (TIPS) is a U.S. government bond designed to help protect investors from inflation. The principal value of a TIPS adjusts over time based on changes in inflation, as measured by an official price index.
Because of this adjustment feature, TIPS are commonly used by investors seeking to preserve purchasing power.
Why It Matters
Inflation reduces the real value of money over time. TIPS help investors manage that risk by increasing principal when inflation rises. This makes them an important tool for conservative investors and retirement savers who want protection against rising prices.
They can be especially useful in long-term financial planning.
How TIPS Work
TIPS pay interest like other Treasury securities, but their principal changes with inflation.
Key features include:
- principal increases when inflation rises
- principal may decrease in deflationary periods
- interest payments are based on the adjusted principal
At maturity, investors receive the adjusted principal or the original principal, whichever is greater.
Example
If inflation rises over the life of a TIPS investment, the bond’s principal value increases, which may result in larger interest payments over time.
TIPS vs Treasury Bonds
- TIPS adjust for inflation.
- Traditional Treasury bonds pay fixed interest on a fixed principal amount.
FAQs About TIPS
Do TIPS protect against inflation?
Yes. Their principal is designed to adjust with inflation.
Who issues TIPS?
TIPS are issued by the U.S. Treasury.
Can TIPS lose value?
Their market price can fluctuate, though they are designed to protect purchasing power over time.
Related Terms
