TREASURY INFLATION PROTECTED SECURITIES
Back to GlossaryDefinition
A Treasury bond that is indexed to an inflationary gauge to protect investors from the decline in the purchasing power of their money. Value rises as inflation rises while the interest payment varies with the adjusted principal value of the bond.
Summary
Treasury Inflation Protected Securities (TIPS) are U.S. government bonds specifically designed to protect investors from inflation. Unlike regular Treasury bonds, the principal value of TIPS adjusts with inflation as measured by the Consumer Price Index (CPI). When inflation rises, the principal increases, and when deflation occurs, it decreases. Interest payments are made twice yearly based on the adjusted principal, meaning both the bond's value and interest payments grow with inflation. This makes TIPS particularly attractive during periods of rising prices, as they maintain the purchasing power of the investment.
Usage Context
Essential when studying government securities, inflation hedging strategies, portfolio diversification, and fixed-income investments. Particularly relevant in discussions about monetary policy effects on investments and retirement planning.
Common Confusions
- Thinking TIPS eliminate all investment risk (they still have interest rate risk)
- Believing the interest rate changes with inflation (only the principal adjusts)
- Confusing TIPS with I Bonds (different inflation-protection mechanisms)
- Assuming TIPS always outperform regular Treasuries (depends on actual vs. expected inflation)
- Not understanding the tax implications of phantom income from principal adjustments
