Treasury Inflation-Protected Securities (TIPS)
Treasury Inflation-Protected Securities, or TIPS, are a type of bond issued by the US government whose value adjusts as inflation rises or falls. A normal bond pays you back a fixed amount at maturity, so if prices rise a lot during the life of the bond, the money you get back buys less than it used to. TIPS are built to guard against that.
The way this works is that the face value of the bond, called its principal, moves up and down with a government measure of consumer prices. As that measure rises, the principal is increased; if it falls, the principal is decreased. The bond also pays a fixed interest rate, called the coupon, twice a year, but because that coupon rate is applied to the adjusted principal rather than the original amount, the actual dollar payment changes over time along with inflation. At maturity, the holder gets back the inflation-adjusted principal, with a floor so it will not be paid back below the original face amount.
The nuance that trips people up is that TIPS protect against inflation, not against interest rate risk. If broader interest rates rise for reasons unrelated to inflation, the market price of a TIPS bond can still fall before maturity, the same as any other bond. TIPS also do not eliminate the risk that the specific inflation measure used doesn't match an individual's real cost of living, which can differ from the government's average.
TIPS are issued directly by the US Treasury at auction and can also be bought and sold on the secondary market before maturity, where their price will move based on both inflation expectations and general interest rate levels.
This term depends on a rule or threshold that changes over time, so no specific figure is quoted here. The claimed denomination ($100 increments) and available maturities (5, 10, 30-year) should be confirmed against the current TreasuryDirect.gov specifications, as issuance terms and minimum purchase amounts can be revised by the Treasury over time. The specific inflation index used (e.g., CPI-U) and any deflation floor details should also be verified against official Treasury documentation before publishing.
Day traders rarely hold TIPS overnight for their inflation protection, but TIPS auctions and yield changes are watched as a signal of the market's inflation expectations, which can move stock, bond, and currency prices intraday.
Suppose an investor buys a TIPS with a $1,000 face value and a 1% coupon. If inflation over the next six months raises the government's price index by 2%, the bond's principal is adjusted up to $1,020, and the coupon payment for that period is calculated as 1% of $1,020 rather than 1% of $1,000, so the payment is slightly higher than it would have been without the adjustment.
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