Treasury Inflation Protection Securities, or TIPS, are marketable securities. They are also referred to as book entry securities. These are nominal return securities. These securities are new offerings by the Treasury Department in an attempt to help offset inflation. It is a means by which investors can secure earnings through a guaranteed, fixed rate security.

TIPS provide the investor with protection against inflation. With minimum investments at one hundred dollars, it is a means that many individuals put their investments toward. Treasury Securities pay interest every six months. This interest payment is directly affected by the Consumer Price Index.

Treasury Inflation Protection Securities pay interest based on a fixed rate. The fixed rate is calculated on the consumer price index. This is applied to an adjusted principal. What this all comes down to is that the interest payments on the securities rise in times of inflation. This also means that in periods of deflation, the principle interest decreases. While they are at a fixed interest rate, that fixed rate is based off of the inflation or deflation at the time the interest is to be paid.

The consumer price index also affects the final payout on the securities when they reach maturity. The majority of the securities is guaranteed to always be at least the amount one paid for them. If you invest two hundred dollars in securities, then when they reach maturity you are guaranteed to at least get your two hundred dollars back.

The time period for the securities to reach maturity is dependent on the time period affixed to them at the time of purchase. One may purchase these securities in maturity time periods of 5 years, 10 years, and 30 years. They are available from your local banker, a broker, and from the United States Treasury.

The Treasury department has assured that the investor never loses their initial investment — the goal of these anti-inflation securities is to at least make as much as inflation. Once the security matures the investor will receive either the adjusted principal or the original principal. The amount is based on whichever is greater. This protects the investor from losing any monetary investments.

Treasury Inflation Protection Securities supposedly very low risk investments. They are guaranteed and insured by the Federal Government.

So it all sounds good, right? Not quite. The problem is this: the government underreports inflation. In other words, the government plays with numbers to make inflation seem lower than it is. This means your investment won’t keep up with inflation — it’ll just keep up with a lower number that the government makes up.

In other words, TIPS are a way to essentially guarantee that you’ll never outperform inflation. They’re horrible investments — stay away from them. Instead, focus on corporate bonds, Treasury Bills, stocks, real estate, mutual funds, gold… or almost any other investment.

Keep learning more:

1. Inflation is the Biggest Risk of Bond Investing


2. Government Bonds 101: Introduction to US Treasury Bills


3. Corporate Bonds 101: An Introduction to Corporate Bonds


4. Bonds Are a Low-Risk, Low Return Investment


5. The Disadvantages of Investing in Bonds


6. Municipal Bonds 101: An Introduction to Municipal Bonds


7. The Advantages of Investing in Bonds

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