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Understanding Treasury Inflation-Protected Securities (TIPS)

Learn how TIPS can hedge against inflation and the potential benefits of adding them to your portfolio.

For many investors, inflation-protected bonds – specifically designed to hedge against rising consumer prices – may be an effective way to seek to mitigate the impact of inflation. Treasury Inflation-Protected Securities, known as TIPS, are one of the most attractive members of this asset class.

What is inflation and why should I be concerned about it?

Inflation is an increase in the price of goods and services and, in effect, shrinks the value of your money. The dollar you invest today will be less valuable tomorrow, posing a serious threat to investors. Inflation is particularly concerning for bondholders since it can erode the purchasing power of future interest and principal payments.

In the United States, a widely accepted measure of inflation is the Consumer Price Index (CPI). As the chart below shows, prices have risen steadily in the United States since the end of World War II, signaling a rise in inflation.

The Rising Cost of a Dollar
This graphic is a line chart that illustrates the increase in the cost of a dollar from 1945 to 2024 using a line chart. The y-axis represents the dollar value, ranging from $0 to $20, while the x-axis represents the years, starting from 1944 to 2022.   The chart shows an upward trend in the cost of a dollar over time, indicating inflation. For the first 30 years measured, from 1944 to 1974, inflation is shown to have been mild or moderate, with only incremental and steady increases.   The steepest increases are observed from the late 1970s onwards, to 2022, for a period lasting approximately 45 to 50 years.   The value of a 1944 dollar reached $2 USD around 1968. It would later reach $5 USD around the year 1980, $10 USD around the year 2000, and $15 USD around the year 2020.   According to the chart, what $1 could buy in 1945 would cost $17.33 today.  The source of the data is PIMCO and the Bureau of Labor Statistics as of January 31, 2024. The graphic includes a disclaimer that it is for illustrative purposes only and is not indicative of the past or future performance of any PIMCO product.
Source: PIMCO, Bureau of Labor Statistics as of 31 January 2024.

For illustrative purposes only. This chart is not indicative of the past or future performance of any PIMCO product.
How TIPS can Grow in Value
This graphic explains how Treasury Inflation-Protected Securities (TIPS) can grow in value over time, focusing on the principal value and coupon value at different stages: at issuance, during life, and at maturity.   The graphic uses a combination of colored bars and gray lines to represent changes in principal and coupon values across the lifetime of the securities, with CPI adjustments illustrated as shaded areas above the initial principal.   The upper part of the graphic depicts lifetime changes in principal value, while the lower part of the graphic depicts lifetime changes in coupon value.   1. Lifetime of principal value:  - At Issuance: Investor pays original principal value.  - During Life: Principal value adjusts with monthly change in CPI (CPI-U, all items, NSA).  - At Maturity: Investor receives the greater of the adjusted or original principal value (referred to as the "deflation floor").  2. Lifetime of coupon value:  - At Issuance: Investor receives a real yield above the principal value and future CPI adjustments; paid semi-annually.  - During Life: Coupon payments vary as the real yield percentage is applied to the CPI-adjusted principal value.  - At Maturity: Coupons are always linked to the CPI-adjusted principal value.  The source of the data is PIMCO, and the graphic is labeled for illustrative purposes only.   Regarding acronyms:   NSA stands for non-seasonally adjusted.   CPI is an abbreviation for Consumer Price Index, a common and universally-respected inflation measure.
Source: PIMCO

Sample for illustrative purposes only.

NSA: Non-seasonally adjusted

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