Treasury Inflation-Protected Bond Funds

Treasury inflation-protected securities (or TIPS) are issued by the U.S. government and are designed to offer protection against the ravages of inflation.

How they work

Like regular Treasury bonds, TIPS are issued with a face, or par, value of $1,000. And also like regular Treasury bonds, they distribute coupon, or interest, payments that are expressed as an annual percentage rate of the par value. However, unlike regular Treasuries, TIPS promise investors that their principal value will rise in lockstep with the Consumer Price Index. That guarantees investors' principal will keep up with inflation, and because TIPS' coupon payments, which are just the real yield, are still calculated as a percentage of that principal amount, their value can move up with inflation as well.

One detail you shouldn't miss

Although TIPS are perhaps the most direct way that investors can add inflation protection to their portfolios, it is important to understand that TIPS do not directly offer protection from rising interest rates. Interest rates and inflation rates don't have to move in unison, and if rates spike without a corresponding rise in inflation, TIPS can suffer a loss.