Treasury Inflation-Protected Securities (TIPS) vs Treasury Securities
Treasuries whose principal adjusts with the CPI. US government debt: bills, notes, and bonds.
What is the difference between Treasury Inflation-Protected Securities (TIPS) and Treasury Securities?
Ordinary Treasuries protect against default but not inflation. TIPS protect against both - the principal adjusts to the CPI.
| Treasury Inflation-Protected Securities (TIPS) | Treasury Securities | |
|---|---|---|
| In one line | Treasuries whose principal adjusts with the CPI. | US government debt: bills, notes, and bonds. |
| Example | $1,000 of TIPS with a 2% coupon after 3% inflation: principal becomes $1,030 and the annual interest $20.60. | A 6-month T-bill bought at $9,800 and redeemed at $10,000 yields about 4.1% annualized. |
| Unit | Bonds & Cash Equivalents | Securities & Instruments |
| Series 65 | Section 2: Investment Vehicles | Section 2: Investment Vehicles |
What is Treasury Inflation-Protected Securities (TIPS)?
The principal rises with inflation (and falls with deflation) as measured by the CPI. The coupon rate is fixed but applies to the adjusted principal, so interest payments rise with inflation too. The annual principal increase is taxable as income each year even though it is not paid until maturity - phantom income - which makes TIPS best held in tax-deferred accounts. At maturity the holder receives the greater of adjusted or original principal.
What is Treasury Securities?
Backed by the full faith and credit of the US government and treated as the risk-free benchmark. T-bills mature in one year or less and are sold at a discount; notes run 2-10 years; bonds run 20-30 years. Interest is exempt from state and local tax.