A type of Treasury bond issued by the U.S. government, they are designed to protect investors from the potential decline in the purchasing power of their money caused by inflation.
TIPS are different from regular Treasury bonds because their principal value adjusts with changes in an inflationary gauge, typically the Consumer Price Index (CPI). This means that as inflation rises, the value of the TIPS increases, providing a safeguard against the erosion of purchasing power. In addition to the inflation-adjusted principal, TIPS also pay interest to bondholders. The interest rate is fixed, but the amount paid adjusts based on the inflation-adjusted principal value. This ensures that investors receive a consistent real rate of return, protecting them from the effects of inflation. TIPS provide a way for investors to hedge against inflation and maintain the purchasing power of their investments. They are particularly attractive to those concerned about the long-term erosion of the value of money due to rising prices.
TIPS are issued by the U.S. Treasury Department and are available in various maturities. They are considered low-risk investments since they are backed by the U.S. government. Like other Treasury securities, TIPS are actively traded in financial markets and offer liquidity to investors. Investors interested in protecting their investments from inflation may consider including TIPS in their portfolio to mitigate the impact of rising prices and preserve the real value of their money.