Treasury Inflation-Protected Securities adjust principal with CPI-U and pay fixed-rate interest on the adjusted amount.
Treasury Inflation-Protected Securities (TIPS) are marketable U.S. Treasury securities whose principal adjusts with inflation and deflation measured through the non-seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U). TIPS pay a fixed coupon rate every six months, but the dollar payment changes because the rate is applied to adjusted principal.
Treasury currently issues TIPS with 5-, 10-, and 30-year terms. At maturity, Treasury pays the greater of the inflation-adjusted principal or the security’s original principal amount.
Treasury calculates an index ratio for each day. The adjusted principal is:
The index ratio compares the reference CPI for a valuation date with the reference CPI for the original issue or dated date:
Under Treasury’s rules, the reference CPI for the first day of a month is the CPI for the third preceding calendar month. Other days use linear interpolation between monthly reference CPI values. This lag means a TIPS principal adjustment does not reflect the latest published inflation reading immediately.
Semiannual interest is:
Assume a TIPS has $10,000 original principal, a 1.50% fixed coupon rate, and an index ratio of 1.08000 on an interest date.
$10,000 x 1.08000 = $10,800$10,800 x 1.50% / 2 = $81$162If subsequent deflation reduces the index ratio to 0.98000, adjusted principal becomes $9,800 and the next semiannual coupon would be $73.50. If the TIPS then matured with that adjustment, Treasury’s floor would make the principal payment $10,000, not $9,800.
The floor would not reimburse an investor who paid $10,600 for the security, and it would not preserve a prior adjusted principal of $10,800. It applies at maturity to original principal, not market purchase price or an inflation high-water mark.
TIPS are quoted using real yields because their principal is adjusted for CPI. Real yield can be positive or negative, and the auction coupon rate can differ from the auction yield because price adjusts above or below par.
Like a nominal bond, a TIPS price generally falls when its required yield rises. A long-dated TIPS can therefore have substantial duration even though its principal is inflation-linked. Inflation protection and protection from market-price loss are different features.
For a secondary-market purchase, settlement can reflect quoted price, index ratio, and accrued interest. An investor should verify the actual invoice amount rather than multiply the screen price by original principal alone.
A simple breakeven inflation calculation subtracts the real yield on a TIPS from the nominal yield on a Treasury security with a comparable maturity:
If a comparable nominal Treasury yields 4.20% and a TIPS yields 1.80%, the simple spread is 2.40%.
That 2.40% is not a pure inflation forecast. The spread can also reflect inflation risk premiums, TIPS liquidity, supply and demand, indexation differences, and imperfect maturity matching. It is better described as market-implied inflation compensation.
| Feature | TIPS | Nominal Treasury note or bond | Series I savings bond |
|---|---|---|---|
| Marketability | Can be sold before maturity | Can be sold before maturity | Nonmarketable |
| Inflation mechanism | Principal adjusts with CPI-U | No inflation adjustment | Composite rate includes inflation component |
| Interest | Fixed rate on adjusted principal every six months | Fixed rate on face value every six months | Accrues under savings-bond rules |
| Maturity price risk | Original-principal floor at maturity | Face value due at maturity | Subject to savings-bond redemption rules |
| Early access | Market sale at current price | Market sale at current price | Redemption restrictions and possible penalty |
| Tax timing | Interest and principal adjustment can be reportable annually | Interest generally reportable when paid | Federal tax can generally be deferred until redemption or maturity |
The instruments should be compared using current official rules and the investor’s account and tax circumstances. A TIPS fund also differs from an individual TIPS because the fund has no single maturity value promised to a shareholder.
TreasuryDirect states that TIPS interest and inflation adjustments are subject to federal tax and exempt from state and local income taxes. It reports annual changes in principal on Form 1099-OID even though the adjusted principal is not paid until maturity or sale. This can create taxable income without matching current cash, sometimes called phantom income.
Deflation adjustments and securities bought at a premium or in the secondary market can complicate reporting. Tax treatment depends on acquisition price, account, holding period, and taxpayer circumstances. Use current Treasury and IRS forms or qualified tax advice rather than applying the general summary mechanically.
This article is educational and is not individualized investment or tax advice. Verify current Treasury and IRS rules for the security, account, and holder involved.