How Fed Policy Affects Treasury Inflation Protected Securities (TIPS)

Learn about Fed policy cycles and how they affect TIPS’ performance.

TIPS are more likely to perform well – relative to various asset classes – in periods of monetary easing and increasing inflation. However, they have the potential to add value in any environment.

What this chart shows
Historically, Fed policies have influenced the availability of money and credit, affecting both economic growth and inflation. Because the value of TIPS changes with the rate of inflation, their performance is directly linked to the Fed’s monetary actions.

What it means for investors
Although TIPS may perform better in certain environments, their low correlation with other types of investments, such as equities, can help reduce overall portfolio volatility. Essentially TIPS have the potential to be an effective diversification tool in any phase of the economic cycle.

Fed policy cycles chart Fed policy cycles chart


Past performance is no guarantee of future results. Treasury Inflation-Protected Securities (TIPS) are inflation-indexed bonds issued by the U.S. government. They are fixed income securities whose principal value is periodically adjusted according to the rate of inflation, which will affect the interest payable on them. Repayment upon maturity of the adjusted principal value is guaranteed by the U.S. government. Neither the current market value of inflation-indexed bonds nor the share value of a fund that invests in them is guaranteed, and either or both may fluctuate. Diversification does not ensure a profit or eliminate the risks of investing.

While inflation-indexed bonds, including TIPS, are structured to provide protection against inflation, the value of these bonds is likely to change in response to changes in "real" interest rates (current market interest rates minus the expected impact of inflation). In other words, a rise in real interest rates can lead to a decrease in the value of inflation-indexed bonds. A decline in real interest rates could produce the opposite effect.

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