What are TIPS? Treasury Inflation-Protected Securities explained
Treasury Inflation-Protected Securities, or TIPS, are U.S. government bonds whose principal changes with an inflation index. They can help match future spending to purchasing power. Their market price can still fall, and their tax treatment needs attention.
The basic terms
Treasury sells TIPS with original terms of 5, 10 and 30 years. The minimum purchase is $100, in $100 increments. The coupon rate is set at the first auction, is never below 0.125%, and stays fixed for the life of the bond. Interest is paid every six months. At maturity you receive the greater of the inflation-adjusted principal or the original principal. These terms come from TreasuryDirect's TIPS page.
| Term | New issues auctioned | Reopenings auctioned |
|---|---|---|
| 5-year | April and October | June and December |
| 10-year | January and July | March, May, September and November |
| 30-year | February | August |
A reopening sells more of an existing bond. It keeps the original CUSIP, maturity and coupon, but sells at a new price. Upcoming dates are on the auction calendar, and every result since 1997 is in the auction results.
One bond, two moving dollar amounts
The coupon rate is fixed. The principal used to calculate each payment changes with Treasury's index ratio. So both the interest payment and the amount due at maturity move with inflation.
Here is an illustrative $10,000 original face amount with a 2% annual coupon. Each payment uses the index ratio on that hypothetical coupon date:
| Index ratio | Adjusted principal | Six-month coupon |
|---|---|---|
| 1.00000 | $10,000 | $100 |
| 1.03000 | $10,300 | $103 |
| 0.98000 | $9,800 | $98 |
The coupon formula is adjusted principal × annual coupon rate ÷ 2. The principal floor applies only at maturity. It does not set a floor under each coupon or under the daily trading price. See Treasury's index-ratio instructions.
How the index ratio is built
TIPS follow the non-seasonally adjusted CPI-U, the all-items Consumer Price Index for All Urban Consumers. Treasury does not use the latest CPI. It uses a reference CPI with a lag. Under 31 CFR Part 356, Appendix B, the reference CPI for the first day of a month is the CPI-U for the third preceding month. For other days, Treasury interpolates in a straight line toward the next month's value.
The index ratio is the reference CPI for a date divided by the reference CPI for the bond's dated date. Treasury rounds it to five decimals. Here is a real example: the 10-year TIPS maturing July 15, 2036 (CUSIP 91282CRE3).
| Date | CPI-U used | Reference CPI | Index ratio |
|---|---|---|---|
| July 15, 2026 (dated date) | April 333.020, May 335.123 | 333.96974 | 1.00000 |
| July 31, 2026 (first issue) | April 333.020, May 335.123 | 335.05516 | 1.00325 |
| September 30, 2026 (reopening) | June 333.952, July 333.918 | 333.91913 | 0.99985 |
The July 31 value is 333.020 + (30 ÷ 31) × (335.123 − 333.020). The September 30 value uses June and July CPI, which had both dipped below May. That is why the ratio fell below 1 two months after issue. CPI values are from the Bureau of Labor Statistics. The reference CPI and index ratios match Treasury's published auction records.
Coupon rate is not real yield
A coupon tells you how interest payments are calculated. Real yield reflects the price you pay relative to the future inflation-adjusted cash flows. Two purchases of the same bond at different prices have different yields even though the coupon is identical.
The July 2036 bond shows this. Its coupon is 2.375%. It sold at a real yield of 2.438% in its first auction in July 2026 and 2.653% when Treasury reopened it in September 2026. The September buyers paid less per $100 of principal and locked in a higher real yield.
A quoted yield to maturity is a valuation measure. Turning it into a realized return also involves the timing and reinvestment of coupons, costs and taxes. It is not a promise that an account value rises by that percentage each year. The price calculation guide works through the full settlement math.
Real yields since 2003
The 10-year TIPS real yield has ranged widely. On this site's daily history, which starts January 2, 2003, the high was 3.15% on November 21, 2008 and the low was −1.19% on August 3, 2021. About 16% of trading days in the series had a negative 10-year real yield.
| Year-end | 10-year real yield | 10-year breakeven inflation |
|---|---|---|
| 2003 | 2.00% | 2.27% |
| 2008 | 2.14% | 0.11% |
| 2012 | −0.67% | 2.45% |
| 2020 | −1.06% | 1.99% |
| 2021 | −1.04% | 2.56% |
| 2022 | 1.58% | 2.30% |
| 2024 | 2.24% | 2.34% |
| October 7, 2026 | 2.92% | 2.36% |
Last trading day of each year. Source: FRED DFII10 and T10YIE, extended with Treasury par yield curves. Download the full series from the yield history page.
The 2.92% reading on October 7, 2026 was higher than about 99.6% of the daily observations since 2003. That says where yields sit in this record. It does not predict where they go next.
Negative real yields reached the auctions too. In Treasury's auction records, 50 TIPS auctions between October 2010 and April 2022 cleared at a negative real yield. The lowest was −1.685%, a new 5-year TIPS in October 2021. Buyers in that auction paid about $109.51 for each $100 of face amount. They accepted a known loss of purchasing power in exchange for inflation protection.
What happened in 2022
2022 is the clearest test of what TIPS do and do not protect against. CPI-U rose 6.45% from December 2021 to December 2022 (278.802 to 296.797). Over the same year, the 10-year real yield rose from −1.04% to 1.58%.
Both forces hit the 30-year TIPS maturing February 15, 2052 (CUSIP 912810TE8). Treasury first sold it in February 2022 and reopened it in August 2022:
| Auction | Real yield | Index ratio at settlement | Price per $10,000 face |
|---|---|---|---|
| February 17, 2022 | 0.195% | 1.00142 | $9,810.27 |
| August 18, 2022 | 0.920% | 1.06397 | $8,461.53 |
| Change | +0.725 points | +6.25% | −13.75% |
Auction prices include the index ratio and exclude accrued interest. Source: TreasuryDirect auction records.
Inflation raised the bond's principal by 6.25% in six months. The rise in real yields cut its price by more. A February buyer who sold in August would have lost money despite high inflation. A buyer who holds to 2052 still receives the inflation-adjusted principal at maturity. The price drop matters only to someone who sells. See selling TIPS before maturity for more 2022 examples.
Deflation and the principal floor
Adjusted principal can fall. When CPI declines, the index ratio declines and so do the coupons. The 5-year TIPS maturing April 15, 2025 is a real case. When it was reopened in June 2020, after CPI fell in the spring of 2020, its index ratio was 0.99282.
The floor protects only the original face amount, and only at maturity. A bond that has built up inflation adjustments can lose part of them in a deflationary period. The floor would not restore them. Older bonds carry large adjustments. The April 2028 bond issued in 1998 has an index ratio above 2, so its floor at $1,000 per $1,000 face is far below its current principal.
How TIPS are taxed
Interest on Treasury securities is subject to federal income tax and exempt from state and local income tax. That rule comes from IRS Publication 550. For TIPS, the coupons are taxable when paid. The increase in inflation-adjusted principal is also reported each year as original issue discount, even though you do not receive that money until the bond matures or is sold.
IRS Publication 1212 explains the method. If principal falls during a year, the result is a deflation adjustment, which generally offsets interest income from the bond. Your basis rises by the OID you include in income. Holders usually receive Form 1099-OID. The phantom income example shows the cash-flow effect in a taxable account.
What is protected, and what is not?
| Concern | What to understand |
|---|---|
| Inflation | Principal follows CPI-U with a lag of about two to three months. Your household's expenses may rise differently. |
| Deflation | Adjusted principal and coupons can decrease. The maturity floor refers to original face amount, not a premium you paid. |
| Early sale | The sale price depends on market conditions and can be below your cost, as 2022 showed. |
| Taxes | A principal increase can create current taxable income before it is paid in cash. |
| Long retirement | A ladder ends at its last planned year. It does not insure a lifetime of spending. |
Ways to own TIPS
You can buy new TIPS at auction through TreasuryDirect or a brokerage. A brokerage also lets you buy existing TIPS on the secondary market, which is the only way to choose any outstanding maturity. A TreasuryDirect holding must be transferred to a bank or broker before it can be sold. How to buy TIPS covers the steps.
An individual bond pays its principal on a known date. A ladder combines maturities so principal and coupons cover several spending years. A TIPS fund holds a rolling portfolio and has no single maturity date. Funds versus individual TIPS compares the two.
Compare the cash flows with your goal before choosing. Funding a known bill is a different task from holding an inflation-linked slice of a larger portfolio. To size a ladder, try the ladder calculator or the cost examples.
Frequently asked questions
Can you lose money on TIPS?
Yes, if you sell before maturity. The market price moves with real yields, and in 2022 the 30-year TIPS maturing in 2052 fell 13.75% per $10,000 face between its February and August auctions. Held to maturity, a TIPS pays at least its original face amount, but that may be less than a premium price you paid.
How often is TIPS principal adjusted?
Every day. Treasury interpolates the reference CPI daily between monthly values, so the index ratio changes each day. Coupons are paid every six months on the adjusted principal for the payment date.
Which inflation index do TIPS use?
The non-seasonally adjusted CPI-U published by the Bureau of Labor Statistics. The value for the first of each month is the CPI-U from three months earlier.
Are TIPS exempt from state income tax?
Yes. Interest on Treasury securities is exempt from state and local income tax but subject to federal income tax. Annual inflation increases in principal are federally taxable as original issue discount.
What is the minimum TIPS purchase?
$100, in $100 increments, at a Treasury auction. Brokers may set their own minimums for secondary-market trades.
Are TIPS a good hedge against inflation?
Held to maturity, a TIPS keeps pace with CPI-U plus the real yield you bought at. Before maturity, changes in real yields can outweigh the inflation adjustment, as they did in 2022. Whether CPI-U tracks your own costs is a separate question.
