Treasury Inflation-Protected Securities: FAQs about TIPS

Inflation continues to be a concern these days, and many investors are looking for investments that can keep pace with, or hopefully beat, the rate of inflation. As a result, Treasury Inflation-Protected Securities, or TIPS, have become a popular investment option.

But investing in TIPS isn't always straightforward. They have many unique characteristics that can make the investing experience a bit confusing. Here are answers to some of the most frequently asked questions about the TIPS market:

1. What are Treasury Inflation-Protected Securities?

Treasury Inflation-Protected Securities, or TIPS, are a type of U.S. Treasury security whose principal value is indexed to the rate of inflation. When inflation rises, the TIPS’ principal value is adjusted up. If there’s deflation, then the principal value is adjusted lower. Like traditional Treasuries, TIPS are backed by the full faith and credit of the U.S. government.

Although there are many measures of inflation, TIPS are referenced to one specific index: the Consumer Price Index, or CPI.

2. Will TIPS coupon payments fluctuate with the level of inflation, as well?

Yes. The coupon rate won’t change but the coupon payment will. TIPS have fixed coupon rates, which are based on the principal value of the security. If inflation rises, that rate is based off a higher principal amount. If inflation rises, so do the coupon payments. The table below provides a hypothetical look at a TIPS principal value and coupon payment based on a constant 3% rise in inflation.

How TIPS principal values and coupon payments can adjust to inflation