Mihir P. Worah
What are TIPS?
TIPS, or Treasury Inflation-Protected Securities, are bonds issued by the U.S. Treasury. They have the unique property that their principal, or face value, moves one-for-one with inflation as manifested in the Consumer Price Index (not seasonally adjusted), while their interest rate remains fixed (though interest payments rise if principal rises or falls if principal decreases). Of course, the current market value of TIPS or the value of a portfolio that invests in them may fluctuate. TIPS are used by both individual and institutional investors to hedge against potential future inflation, and the real return is known, if held to maturity, (though the dollar payments may change) since the payments are linked to inflation. Real return refers to the return after adjusting for inflation.
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