TIPS are US Treasury bonds whose principal value rises and falls with the Consumer Price Index, guaranteeing a real (inflation-adjusted) return if held to maturity. Unlike a fixed-coupon bond, whose real value erodes when inflation rises, TIPS principal grows alongside inflation — making them the most direct, lowest-risk inflation hedge available, at the cost of typically lower yields than nominal Treasuries in low-inflation periods.
Why it matters
- —They solve the exact problem ordinary long-duration bonds suffer in inflationary periods — a fixed coupon becoming worth less in real terms.
- —Because the hedge is structural (built into the bond's principal), it doesn't rely on correctly timing inflation the way a commodity trade does.
- —TIPS tend to underperform nominal Treasuries when inflation is low or falling, since investors give up some yield for the inflation protection.
How to read it
| Rising or high inflation expected | TIPS outperform nominal Treasuries of the same maturity |
| Falling or low inflation expected | Nominal Treasuries typically outperform TIPS |
| Breakeven inflation rate (nominal yield − TIPS yield) | The market's implied inflation expectation over that maturity |