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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

Glossary of Key Investment Terms


Past performance is not a guarantee or a reliable indicator of future results.

Diversification does not ensure against loss. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Inflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. government. Portfolios that invest in such securities are not guaranteed and will fluctuate in value.

The Consumer Price Index (CPI) is an unmanaged index representing the rate of inflation in U.S. consumer prices as determined by the U.S. Bureau of Labor Statistics. There can be no guarantee that the CPI or other indexes will reflect the exact level of inflation at any given time. It is not possible to invest directly in an unmanaged index.

Hypothetical illustrations have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve results similar to those shown. In fact there are frequently sharp differences between hypothetical results and actual results subsequently achieved by any particular trading program.

One of the limitations of hypothetical results is that they are generally prepared with the benefit of hindsight. In additional, hypothetical scenarios do not involve financial risk, and no hypothetical illustration can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation if any specific trading program which cannot be fully accounted for in the preparation of a hypothetical illustration and all of which can adversely affect actual results.

The correlation of various indexes or securities against one another or against inflation is based upon data over a certain time period. These correlations may vary substantially in the future or over different time periods that can result in greater volatility.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice. 

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world.


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