Treasury Inflation-Protected SecuritiesTIPS
TIPS are US Treasury bonds whose principal rises and falls with the consumer price index. The fixed coupon is paid on the adjusted principal, so the interest payments also rise with inflation.
Ordinary bonds pay fixed amounts, so inflation slowly eats their value. Treasury Inflation-Protected Securities are designed to fix that: their principal is adjusted for inflation, and interest is paid on the adjusted amount. The yield on TIPS is therefore a real yield — a return above inflation. This entry explains how TIPS work, what they protect against, and what risks remain.
- Category
- Bonds and Interest Rates
- Reading time
- 4 min
- Also called
- Inflation-linked bond, Linkers, Inflation-protected bonds
- Updated
TIPS in plain words
With most Treasury securities the principal is fixed. With TIPS it can go up or down over the term, following a version of the Consumer Price Index from the Bureau of Labor Statistics.1 See Consumer Price Index. Like other Treasury securities, they are backed by the full faith and credit of the US government.2
Interest is paid every six months at a fixed rate on the adjusted principal, so payments rise with inflation. At maturity you receive the adjusted principal or the original amount, whichever is higher.1
How TIPS work, step by step
Buy at auction or in the market
TIPS are issued for 5, 10 or 30 years.1
Principal adjusts
It rises with inflation and can fall with deflation.
Fixed rate on adjusted principal
The rate is set at auction and is never below 0.125%.
Interest every six months
Payments vary as the principal changes.
At maturity
You get the higher of adjusted or original principal.
Compare with nominal Treasuries
The yield gap shows expected inflation. See Breakeven Inflation.
Worked examples
Example 1 — Principal adjusts
Inflation protectionYou buy $10,000 of TIPS with a 1.5% rate. Over a year, the index rises 3%.
| Adjusted principal | $10,000 × 1.03 = $10,300 |
| Annual interest on adjusted principal | 1.5% × $10,300 = $154.50 |
Both principal and interest grow with inflation.
Example 2 — Deflation floor
FloorOver the life of a TIPS, prices fall overall and the adjusted principal ends at $9,800 on $10,000 original.
| Paid at maturity | $10,000 (the original amount) |
At maturity you receive at least the original principal.
Example 3 — TIPS still have price risk
Rate riskReal yields rise from 1.5% to 2.5% shortly after you buy a 10-year TIPS.
| Market price | Falls |
Inflation protection does not remove interest-rate risk if you sell before maturity. See Real Yield.
TIPS vs. ordinary Treasuries
| Aspect | TIPS | Ordinary Treasury notes/bonds |
|---|---|---|
| Principal | Adjusts with inflation | Fixed |
| Interest | Fixed rate on adjusted principal | Fixed amount |
| Yield quoted | Real yield | Nominal yield |
| Best when | Inflation is higher than expected | Inflation is lower than expected |
Why investors use TIPS
Protecting purchasing power
Returns keep pace with inflation. See Inflation.
Reading inflation expectations
The gap to ordinary Treasuries signals expected inflation.
Diversification
Behave differently from nominal bonds when inflation surprises.
Long-term planning
Matching future real spending needs.
Advantages and disadvantages
Advantages
- Principal and interest rise with inflation.
- Backed by the US government.
- Floor at original principal at maturity.
Disadvantages
- Prices still fall when real yields rise.
- Lower yields than nominal bonds when inflation stays low.
- Inflation adjustments can be taxable before they are received in cash (rules vary).
- Linked to a specific price index, which may differ from your own costs.
Going deeper
Read as far as you need. Each level builds on the one before it.
Real vs. nominal
Beginner
A TIPS yield is a real yield: what you earn above inflation. Ordinary Treasuries quote nominal yields that include expected inflation.
Breakeven inflation
Intermediate
Nominal yield minus TIPS yield of the same maturity is the breakeven inflation rate — roughly the inflation the market expects. See Breakeven Inflation.
Index lag
Advanced
The principal adjustment uses index data with a short lag, so TIPS track inflation closely but not instantly.
Common mistakes
Thinking TIPS cannot lose value
Prices fall when real yields rise.
Comparing TIPS and nominal yields directly
One is real, the other nominal.
Ignoring taxes on adjustments
Check local tax treatment.
Expecting protection against all price rises
They follow a specific index.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- TIPS principal adjusts with the consumer price index.
- Interest is a fixed rate on the adjusted principal, paid every six months.
- At maturity you get the higher of adjusted or original principal.
- TIPS yields are real yields.
- Prices still move with real interest rates.
Frequently asked questions
Are TIPS a good hedge against inflation?
How often do TIPS pay interest?
Can I lose money on TIPS?
Further learning
- Treasury Bills, Notes and Bonds
The wider family of Treasuries.
- Inflation
What TIPS protect against.
- Consumer Price Index
The index that adjusts the principal.
- Yield to Maturity
How bond yields are measured.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- TreasuryDirect (U.S. Treasury). Treasury Inflation-Protected Securities (TIPS) (opens in a new tab) Checked .
- Investor.gov (SEC). Treasury Securities (glossary) (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.