description Treasury Inflation-Protected Securities (TIPS) Overview
TIPS are U.S. Treasury bonds whose principal value adjusts with changes in the Consumer Price Index (CPI). This means that as inflation rises, the principal and, consequently, the interest payments increase, protecting the investor's real purchasing power. They are a specialized tool for investors whose primary concern is maintaining purchasing power over long time horizons.
help Treasury Inflation-Protected Securities (TIPS) FAQ
How does inflation change the value of a TIPS bond?
The principal of a TIPS bond is adjusted using changes in the Consumer Price Index for All Urban Consumers, or CPI-U. Its fixed coupon rate is then applied to that adjusted principal, so the dollar interest payment can rise or fall.
Can TIPS lose money when inflation falls?
Their inflation-adjusted principal can decline during deflation, and market prices can also fall when real interest rates rise. At maturity, the U.S. Treasury pays the greater of the original principal or the inflation-adjusted principal.
What is the difference between TIPS and Series I savings bonds?
TIPS are marketable Treasury securities whose prices fluctuate and which can be sold before maturity. Series I savings bonds are nonmarketable, have annual purchase limits, and cannot be redeemed during their first 12 months.
Why can holding TIPS in a taxable account create a tax bill before maturity?
Federal income tax generally applies to both coupon interest and annual inflation increases in principal, even though the principal adjustment is not paid in cash until sale or maturity. TIPS interest is exempt from state and local income taxes.
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