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Treasury Inflation-Protected Securities (TIPS) Basics

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What are Treasury Inflation-Protected Securities?

Treasury Inflation Protected Securities (TIPS), are inflation-indexed government bonds whose principal amount is adjusted periodically for inflation. A fixed interest rate is paid semi-annually on the adjusted amount. They may also be referred as Treasury Inflation-indexed Securities (TIIS).

Overview of the TIPS Market

Established in 1997 by the US Treasury, TIPS have grown rapidly into an integral part of the bond market. With almost $200 billion outstanding, TIPS allow the Treasury to broaden its investor base and diversify its funding risks, as well as supply the demand from investors to offer inflation protected securities. Liquidity in the TIPS market is improving, with daily trading volume nearly doubling in the past two years.

Key features of TIPS

The interest rate, which is set at auction, remains fixed throughout the term of the security. The principal amount of the security is adjusted for inflation, but the inflation-adjusted principal will not be paid until maturity. Semiannual interest payments are based on the inflation-adjusted principal at the time the interest is paid.
The index for measuring the inflation rate is the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (CPI-U), published monthly by the Bureau of Labor Statistics (BLS).
The auction process uses a single-price auction method that is the same as that currently used for all of the Treasury’s marketable securities auctions. At maturity, the securities will be redeemed at the greater of their inflation-adjusted principal or par amount at the original issue.
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Lance Pan joined Capital Advisors Group in 2003. As Director of Investment Research and Strategy, Lance assesses the risk and relative value of asset classes and credits, creates advanced credit approval and surveillance procedures, issues credit opinions, and provides investment strategy recommendations. Lance oversees Capital Advisors Group’s Credit Committee.

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