Treasury Inflation-Protected Securities (TIPS) for Investing in Inflation
While the United States has enjoyed a relatively low inflation rate since the 1980s, there have been periods when inflation surged sharply. In 2022, inflation touched 9.1%, one of the highest levels seen since 1981. Historically, too, inflation has shown similar spikes. The inflation rate was around 5.9% in 1950 and about 9% in 1978. More recently, the 12-month inflation rate was much lower in comparison. In July 2025, inflation stood at 2.7%.
These numbers show that inflation moves in cycles. It rises, falls, and then returns, making it a critical part of the economic landscape. Because inflation is likely to remain a recurring force in the years ahead, you need to invest in tools that can help protect your purchasing power.
There are several investment options in the market that aim to deliver inflation-beating returns. Among these, Treasury Inflation-Protected Securities (TIPS) are a unique option as they are specifically designed for this purpose. These bonds adjust with inflation and can safeguard your returns during inflationary periods. Let’s explore what they are and how they work.
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What are inflation-protected securities?
Inflation-protected securities are one of those financial tools that really help you outpace inflation without carrying too much risk. They are a type of government-backed bond designed to make sure your money retains its purchasing power over the years. In the U.S., these bonds are called Treasury inflation-protected securities, or TIPS. They work like regular bonds but offer better protection against inflation, so your purchasing power does not diminish over the years.
What makes TIPS different from traditional bonds is how they react to inflation. A normal bond pays you a fixed interest amount based on its original principal. That sounds fine, but if inflation shoots up during the life of the bond, say as it did in the year 2022, that same fixed income will suddenly buy you a lot less. This is the classic inflation risk that every long-term bond investor has to deal with.
Treasury inflation-protected securities, however, help you counter inflation no matter the prevailing rate. They are tied to the Consumer Price Index (CPI), which tracks prices of goods and services across the economy. When inflation goes up, the principal value of your Treasury inflation-protected securities automatically adjusts upward. For example, if inflation rises by 2%, your bond’s principal rises by 2% as well. If there is deflation and prices fall, then the principal gets adjusted downward. These adjustments happen regularly, so your investment is always adjusted to the prevailing inflation rate.
Now, even though the interest rate on TIPS is fixed at the time of purchase, the actual interest you receive is not fixed because the interest rate is applied to the adjusted principal, not the original one. So, when inflation pushes your principal higher, your interest payment rises as well. When prices go down, the interest payment shrinks.
To give you a simple example, imagine you invest $500 in a TIPS bond that pays 1% interest annually. If there is no inflation that year, you will earn 5% in interest. But if inflation climbs 2%, your principal adjusts to $510. Your interest payment for the year becomes 5.1% instead of 5%. Over time, and especially with larger investments, you can maintain your purchasing power rather than fall behind the rising prices.
One important thing to know is that even though the principal can go down during periods of deflation, you are guaranteed to get at least your original principal back if you hold the bond until it matures.
Treasury inflation-protected securities also come in different maturities, usually 5, 10, or 30 years, which gives you flexibility depending on your financial timeline. If you are interested in buying them, you can purchase them directly from the U.S. Treasury for a minimum purchase of $100. You can also invest in TIPS mutual funds and Exchange Traded Funds (ETFs).
Important things to know about inflation-protected treasury bonds
If you are thinking about adding inflation-protected bonds to your portfolio, it helps to know a few practical details before you dive in:
- The interest rate is fixed at the time of auction and will not be lower than 0.125%. Even though the rate itself stays the same, the amount you earn changes because it is applied to the inflation-adjusted principal.
- Interest is paid twice a year until the bond matures.
- These bonds are now issued only in electronic form.
- They come in three maturity options of 5, 10, and 30 years.
- The minimum purchase amount is $100, and you have to buy them in increments of $100. If you are bidding non-competitively, you can buy up to $10 million. Competitive bidders can go up to 35% of the total offering amount.
- Treasury inflation-protected securities auctions follow a schedule:
- Five-year Treasury inflation-protected securitiesare issued in April and October, with reopenings in June and December.
- Ten-year Treasury inflation-protected securitiesare issued in January and July, and reopened in March, May, September, and November.
- The 30-year version is issued in February and reopened once in August.
- If you ever want exact dates, the Treasury’s auction calendar lays everything out clearly.
- You will owe federal income tax every year on the interest you earn. The inflation adjustment to your principal will affect your federal taxes for that year. However, the good news is that you will not owe any state or local taxes on inflation-protected treasury bonds.
Reasons to invest in Treasury inflation-protected securities
Inflation-protected treasury bonds have a lot to offer. Let’s get to know some of their benefits:
1. You protect your money from inflation
The biggest reason to choose Treasury inflation-protected securities is inflation protection. With most investments, inflation affects your returns over time. Treasury inflation-protected securities work differently because both the principal and interest payments are adjusted for the country’s prevailing inflation. When prices rise, the principal amount increases. And since your interest is calculated on this adjusted principal, your interest payments are also increased. This keeps your purchasing power intact. If you think about expenses you will face in the future, like healthcare, travel, and even everyday necessities, having inflation protection can feel reassuring.
It is important to note that Treasury inflation-protected securities alone will likely not make you wealthy. They are not meant to be the star of your portfolio. But if you use them alongside other growth-oriented investments, you can secure your future more effectively. Stocks, real estate, and other asset classes can offer better long-term returns, but they can also come with greater volatility. Treasury inflation-protected securities can potentially fill the gap by giving you a dependable way to offset inflation without taking on unnecessary risk. Hence, you can speak to a financial advisor about adding them to your portfolio as part of a diversified, long-term financial plan.
2. You can maintain a low risk
Another big reason to turn to inflation-protected treasury bonds is the low risk involved. The U.S. government backs these securities, so from a credit-risk standpoint, they are a safe investment. And there is also an additional safety cushion built in with these bonds. When your Treasury inflation-protected securities mature, you will get back either your original principal or the inflation-adjusted amount, whichever is higher. Even in the case of deflation, you are not walking away with less than what you put in. So, the grass is greener whichever side you are on.
This makes Treasury inflation-protected securities especially appealing for retirees and for anyone nearing retirement. At that stage, protecting your capital is essential. You want predictability. You want peace of mind. And Treasury inflation-protected securities can give you all this without forcing you into riskier inflation-beating options.
Equities may offer strong long-term returns, but they can be volatile. Real estate can hedge inflation, too, but it requires significant investments and comes with its own set of risks and liquidity issues. Inflation-protected bonds, by comparison, are simple, accessible, and easy to manage.
3. You can benefit from favorable tax laws
While you will have to pay federal income tax on the interest you earn, there are no state or local taxes. So, you do get to keep more of your money with you than some other options that may be taxed twice at the federal and state levels.
Disadvantages and risks associated with Treasury inflation-protected securities
Even with all the benefits, Treasury inflation-protected securities are investments, after all. And all investments carry some risk, however small or large. As an investor, you need to know and understand what these are so you can make informed decisions. Here are some cons and risks associated with inflation-protected treasury bonds:
1. You possibly earn lower interest rates
TIPS generally pay less than other government bonds, and definitely less than many corporate bonds. The inflation protection is built into the structure, so you give up some yield in exchange for the safety net. Treasury inflation-protected securitiesdo protect your purchasing power, but the overall return can still feel low compared to other fixed-income options. And if inflation stays low while you hold them, their sole purpose is negated. In periods of very low inflation, a regular Treasury bond may give you a better return.
2. They can be costly
Another point to consider is cost. Treasury inflation-protected securities tend to be more expensive than traditional Treasury bonds. Higher-priced bonds generally offer lower yields, which is part of why their interest rates look less attractive. If you are trying to maximize returns and inflation is not a significant concern for you, inflation-protected treasury bonds might not be the most efficient choice.
3. They carry interest-rate risk
Inflation-protected bonds’ prices fall when interest rates rise. If you need to sell your investment before the bond matures and rates happen to be climbing, you could walk away with less than what you expected.
4. You have taxes to consider
The inflation adjustments to your principal are taxable in the year they occur, even though you will not actually receive the adjusted amount until maturity. So, you end up paying tax on money you have not even actually received yet.
You also owe federal taxes on the semi-annual interest payments. While inflation-protectedbonds are exempt from state and local taxes, the federal tax hit can feel heavier than you expect. When your investments mature, or you sell them, you will only pay federal tax on the principal adjustment for the final year, even though you will receive the full inflation-adjusted increase from when you first bought them. It is not complicated once you get used to it, but it does require some planning. A financial advisor can help you understand this better.
Should TIPS have a place in your portfolio?
Treasury inflation-protected securities can help you shield yourself from inflation. They are quite simple once you understand how they work, but it is still important to know what you are getting into, including their benefits, limitations, and risks. When you use them as part of a broader, well-balanced portfolio, they can offer many benefits, especially during periods of high inflation.
That said, whether they deserve a big or small place in your portfolio depends entirely on your personal goals and situation. If you are unsure about how much to allocate or how inflation-protected treasury bonds fit into your overall strategy, you can use our financial advisor directory to connect with a financial advisor near you who can guide you through the process and help you decide whether inflation-protected bonds are the right choice for you.
Frequently Asked Questions (FAQs) about Treasury inflation-protected securities
1. Are Treasury inflation-protected securities backed by the U.S. government?
Yes. Treasury inflation-protected securities are fully backed by the U.S. government, which is why they are considered a low-risk investment.
2. What is the minimum and maximum investment amount?
You can start with as little as $100. If you are bidding non-competitively at an auction, you can invest up to a maximum of $10 million.
3. Should you invest in Treasury Inflation-Protected Securities?
You can, especially if inflation protection is a concern for you. These bonds help your money maintain its purchasing power over time. That said, the final decision really depends on your goals, your time horizon, and risk appetite.
4. Why should you factor inflation into your financial planning?
Inflation reduces the value of your money. Over the years, it can affect your lifestyle and long-term goals. When you account for inflation in your planning, you prepare for your future needs and set yourself up for a more comfortable tomorrow.
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