Treasury Inflation-Protected Securities
November 28, 2007
Tips on Buying Treasury Inflation Protected Securities (TIPS)
The Treasury Department issues a security called Treasury Inflation-Protected Securities (TIPS) which pay investors a fixed rate of interest set at auction and adjusts principal semi-annually based on the change in the Consumer Price Index for the preceding six months. The U.S. Treasury offers auctions on TIPS quarterly in denominations as small as $1,000. Brokers and dealers maintain a secondary market in TIPS securities allowing investors to buy or sell them at any time. TIPS pay interest to investors semi-annually based on the inflation-adjusted principal at the time interest is paid and the original interest rate. At maturity TIPS can be redeemed for the inflation-adjusted principal or in the case of deflation (negative CPI growth) for the par mount of at the time the security was purchased.
The two major benefits of TIPS are:
(1) Principal is backed by the full faith and credit of the United States government. Widely considered the highest level of safety achievable by an investor.
(2) Principal is indexed to the CPI, thus the real purchasing power of the principal and interest is guaranteed to keep pace with inflation.
More information about TIPS from the U.S. Treasury Department is available here.
Recent TIPS auctions results are here.
CPI/Inflation data is available here.
