TIPS 101: An Introduction to Inflation-Protected Bonds
Here’s a question I get pretty consistently: “How do I protect my money against inflation?” I’ve written before about Series I Bonds, which are U.S. government-issued bonds with interest rates that are adjusted every 6 months based on inflation. In this newsletter, we’ll consider another inflation hedge: Treasury Inflation-Protected Securities (TIPS). TIPS function differently from I Bonds, which means they might be more, less, or equally useful for your unique situation.
If you’re feeling the pinch of rising inflation, you can always reach out to our advisors to talk through your options. Read on, and let me know what questions pop up.
In December 2021, I wrote what ended up becoming one of our most popular newsletters to date. Would you believe it was about bonds? Series I savings bonds, to be exact.
And we weren’t the only ones excited about it: between November 2021 and October 2022, Americans opened over 1.85 million new savings bond accounts and purchased more than $27 billion dollars worth of Series I bonds (for comparison, $364 million in I bonds were purchased in 2020). The surge in demand was nearly too much for the ancient TreasuryDirect website and its customer service team, prompting a modernization update and an expansion of call center resources to handle the influx.
Of course, it wasn’t necessarily bonds that folks were interested in. It was the protection that this special type of bond was offering: interest rates that adjusted automatically to account for changes in inflation. From that newsletter:
“Rising inflation is a problem for fixed-income investments. For instance, investors will end up losing money on a regular ten-year bond with a 1.9% interest rate if the inflation rate is higher than 2%.”
Now at the end of summer 2026, we find ourselves in an economic environment marked by persistently high inflation (3.7% as of August 2026) and a massive government deficit expected to top $2 trillion this year. Investors are once again searching for a way to protect their money against consistently elevated costs of living.
Enter TIPS - Treasury Inflation-Protected Securities.
Both TIPS and Series I Bonds are U.S. government-issued bonds. But unlike Series I Bonds, which adjust the interest rate based on inflation, TIPS have a fixed coupon rate and inflation adjustments are made to the principal. Because the government calculates your interest using this changing principal, your actual cash payouts will vary every six months.
Here’s a quick example:
Imagine you purchase a $10,000 TIPS bond with a fixed 2% interest rate. If there is no inflation over the next year, the government will make no adjustments and your principal remains $10,000. You’ll receive $200 for the year (divided into two semiannual payments of $100). If inflation rises by an exorbitant amount of 3%, the government will adjust your principal upward to $10,300. Your 2% coupon is calculated on this new principal, and you receive $206 for the year (two payments of $103).
Sounds pretty great, right? Let’s add another interesting layer. TIPS bonds can be purchased directly from TreasuryDirect at scheduled auctions for a set price, in $100 increments. They can also be bought from other investors via the “secondary market” - through a brokerage like Fidelity or Schwab. In this secondary bond market, TIPS prices rise and fall as investors’ expectations about inflation and interest rates change.
To compensate for current economic conditions such as persistent inflation, continued government deficits, and other uncertainties, investors are demanding higher yields and bond prices are falling as a result. In fact, 30-year TIPS are currently “on sale” at deeply discounted prices, with real yields of up to 3%. That means you can earn as much as 3% on top of whatever inflation ends up being.
Who might be interested in TIPS?
Inflation affects everyone, but whether or not it makes sense to allocate to TIPS (and how much) depends on your unique situation. A non-comprehensive starting point: if you are entering retirement, highly sensitive to stock market volatility, dependent on investment income for current and near-term needs, or want to hedge against persistently high inflation or unexpected inflation spikes, you might be interested in this type of bond.
The best source for more info on Treasury Inflation-Protected Securities is TreasuryDirect.gov. Meanwhile, here are a few details:
Yield: TIPS have a fixed coupon or interest rate, but their principal is adjusted every six months based on changes in inflation. Because interest payments are calculated from the inflation-adjusted principal, the amount of interest you receive can rise or fall with inflation. When TIPS are bought on the secondary market, their price determines their real yield - the return an investor can expect on top of inflation if the bond is held to maturity. Lower bond prices mean higher yields and vice versa.
Limits: When buying directly from TreasuryDirect, TIPS are purchased in increments of $100. There is no Treasury-imposed limit on how much TIPS you can buy on the secondary market, but brokerages may set their own minimum purchase amounts or other trading requirements. Check with your specific brokerage for the details.
Maturity: TIPS are available in 5, 10, and 30 year maturities. They can be sold before maturity in the secondary market, but investors who hold until maturity will lock in the bond’s real yield plus any inflation adjustment to the principal. In case of deflation, the U.S. government guarantees that you will receive at least the original principal amount at maturity.
Taxes: Interest on TIPS is not taxable at the state level (relevant for non-Texan readers who live in a state with income tax). However, any inflation adjustments to the principal amount (which are based on monthly CPI-U) and the semiannual interest payments (based on the coupon rate set at the time of auction) are both subject to federal tax in the year they occur. If you hold individual TIPS in a taxable account, you must pay taxes annually on this "phantom income.” To avoid this tax drag, consider holding individual TIPS inside tax-advantaged retirement accounts like an IRA.
Availability: You can purchase newly-issued TIPS bonds from TreasuryDirect during scheduled auctions. You can also buy them from other investors on the secondary market via your brokerage of choice - Fidelity, Schwab, etc.