Glossary
Treasury Inflation-Protected Securities (TIPS)
US Treasury bonds whose principal rises and falls with the Consumer Price Index, so their interest and final payment keep pace with inflation.
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Treasury Inflation-Protected Securities (TIPS) are US government bonds designed to protect buyers from inflation. Their principal is adjusted with the Consumer Price Index for All Urban Consumers (CPI-U), so both the interest payments and the amount repaid at maturity grow when prices rise. They matter because ordinary bonds lose purchasing power to inflation, while TIPS lock in a real, inflation-adjusted yield.
How it works
The Treasury issues TIPS with 5-, 10- and 30-year maturities. Each pays a fixed coupon rate twice a year, but the rate is applied to the inflation-adjusted principal, not the original face value. If the CPI falls, principal can be adjusted down, but at maturity you receive at least the original principal.
Reading TIPS yields
The gap between a regular Treasury yield and a TIPS yield of the same maturity is the breakeven inflation rate: the average inflation at which the two would earn the same. If a 10-year note yields 4.2% and a 10-year TIPS yields 1.9%, breakeven is 2.3%. Inflation above that favors TIPS; below it favors the regular note.
TIPS are not risk-free in price. Their market value still falls when real yields rise, as in 2022. The annual inflation adjustment to principal is taxable federal income in the year it occurs, even though you are not paid it until maturity, which is why many investors hold TIPS in tax-deferred accounts.