description Inflation-Protected Treasury Bonds (TIPS) Overview
TIPS are U.S. Treasury securities whose principal value adjusts with the Consumer Price Index (CPI). This makes them an excellent tool for preserving purchasing power during periods of high inflation, which erodes the value of fixed nominal payments.
While their real returns can be modest in low-inflation environments, their protection against unexpected inflation spikes is invaluable for long-term savers.
help Inflation-Protected Treasury Bonds (TIPS) FAQ
How does inflation change the value of a TIPS bond?
The Treasury adjusts TIPS principal using changes in the Consumer Price Index for All Urban Consumers. Interest is then calculated from that adjusted principal, so coupon payments can rise when inflation increases.
Can TIPS lose money even though they protect against inflation?
Yes. A TIPS fund or a bond sold before maturity can fall when real interest rates rise, and market prices fluctuate like those of other Treasury securities. Newly issued TIPS held to maturity have a federal guarantee that repayment will not be below the original principal.
Why can TIPS create taxable income before I receive the cash?
In a taxable U.S. account, annual inflation adjustments to principal are generally treated as federal taxable income even though the added principal is paid at maturity. This effect is often called phantom income.
What is the difference between buying individual TIPS and a TIPS ETF?
An individual TIPS bond has a stated maturity and can return its inflation-adjusted principal if held to that date. An ETF such as iShares TIP continually holds and trades many bonds, so it has no single maturity value for an investor.
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