Investing in Treasury Inflation-Protected Securities (TIPS)
The U.S. Treasury has been issuing Treasury Inflation-Protected Securities (TIPS) since 1997. TIPS provide investors with an investment option that protects against the effects of inflation. Like all marketable US Treasury securities, TIPS are backed by the full faith and credit of the US Government. TIPS are available to individual and institutional investors alike.
Interest payments on TIPS are made semi-annually and are linked to the Consumer Price Index for Urban Consumers (CPI-U). The underlying value of the principal grows at the same rate that prices (as measured by CPI-U) rise. When the principal grows, interest payments grow also since interest payments are a fixed percentage of principal. At maturity, if inflation has occurred and increased the value of the underlying security, Treasury pays the owner the higher inflation-adjusted principal. If, however, deflation has occurred and decreased the value of the underlying security, the investor receives the original face value of the security.
Earnings from TIPS are exempt from state and local income taxes just as other US Treasury notes and bonds. TIPS owners pay federal income tax on interest payments in the year they are received and on growth in principal in the year that it occurs.
Treasury is expanding the TIPS program by adding a five-year and 20-year security to the current 10-year. US Treasury securities are available directly from us as well as from banks and brokers.