What are TIPS, actually?

Treasury Inflation-Protected Securities are U.S. government bonds whose principal is re-indexed to consumer prices every day. They are the only widely available instrument that can promise, with federal backing, a return measured in purchasing power rather than dollars.

The mechanism, in one paragraph

A TIPS starts life at a par value, say $1,000. Every day the Treasury multiplies that principal by an index ratio built from CPI-U, with roughly a three-month lag. If cumulative inflation since issue is 20%, the principal is $1,200. The bond's fixed coupon rate, set at auction, is paid twice a year on the adjusted principal, so payments grow with prices too. At maturity you receive the adjusted principal or the original par, whichever is greater; that guarantee is the deflation floor. First issued in 1997, TIPS now come in 5-year, 10-year, and 30-year maturities, auctioned on a published annual calendar.

The real yield is the whole ballgame

Because inflation compensation is automatic, the price of a TIPS is quoted as a real yield: the annual return above inflation you lock in by buying at that price and holding to maturity. A 10-year TIPS at a 2.4% real yield turns today's purchasing power into 2.4% more of it, compounded, per year, regardless of what inflation does. That number moves daily; its full history since 2003 is the context for any purchase. It has ranged from -1.2% at the 2021 bottom to over 3% in the 2008 panic, and recent readings sit above the vast majority of days on record.

The gap between nominal Treasury yields and TIPS real yields is the breakeven inflation rate, the market's own inflation forecast. Inflation above the breakeven means the TIPS buyer wins; below it, the nominal buyer wins. This is the cleanest way to decide between the two.

What TIPS are for

Three uses cover nearly everyone. As a diversifier, TIPS hedge the specific scenario that hurts nominal bonds most, unexpected inflation; most people use a fund for this. As a savings vehicle for a known future expense, an individual TIPS maturing near the date is close to perfect. And as retirement income, a ladder of individual TIPS converts a lump sum into a guaranteed real income stream for decades, which is the use this site exists to price. Small savers should also compare I Bonds, which suit smaller amounts with different tradeoffs.

The two catches

First, taxes. The annual principal adjustment is taxable federal income in the year it accrues even though it is not paid until maturity, the famous phantom income, which is why ladders generally belong in tax-advantaged accounts. TIPS interest is exempt from state and local tax, a real advantage in high-tax states.

Second, price risk before maturity. The inflation guarantee binds only at maturity; in between, a TIPS trades like any bond and falls when real yields rise. Holders who need to sell early, and funds, which never mature at all, both learned that in 2022. Held to its date, none of that interim movement matters.

Buying them

Individual TIPS are bought at Treasury auction through any major brokerage for no fee, on the secondary market any trading day, or through TreasuryDirect; the mechanics, calendar, and pitfalls are in how to buy TIPS.