What are Treasury Inflation-Protected Securities?
TIPS are US Treasury bonds whose principal rises and falls with inflation. Instead of paying a fixed dollar amount, the Treasury scales each bond's principal by the Consumer Price Index, so the holder's purchasing power is protected.
The coupon rate is fixed when the bond is issued, but it's paid on the inflation-adjusted principal. When prices rise, both the principal and every coupon payment rise with them. At maturity the holder receives the adjusted principal or the original par amount, whichever is greater, so deflation can never push repayment below par.
Because the payments keep pace with inflation, a TIPS yield is a real yield. The gap between a nominal Treasury yield and a TIPS yield of the same maturity is the market's breakeven inflation rate.
- Issuer
- US Department of the Treasury
- Terms
- 5, 10 and 30 years
- Inflation index
- CPI-U, not seasonally adjusted
- Coupons
- Semiannual, fixed rate on adjusted principal
- At maturity
- Greater of adjusted principal or par