Can Treasury Securities Protect You From Inflation?

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Editor's Note: This story originally appeared on NewRetirement.

Treasury Inflation-Protected Securities (TIPS) are sometimes touted as a good investment option during times of rising inflation. Are they right for you?

TIPS are a kind of government-issued bond designed to protect your money from inflation. When you buy TIPS, you are loaning the government money and are paid an agreed-upon interest rate for the term of the bond, and your original investment is repaid to you at the end of the term. (This is how all bonds work.)

What makes TIPS unique is that in addition to earning interest, the value of your original investment is adjusted for inflation.

For example (not actual numbers), if six months ago you invested $10,000 in TIPS that adjust every six months and pay you 1% interest rate every six months, you would currently:

  • Have earned $100 in interest
  • Have increased your principal by $500 (assuming inflation rose 5% over the last six months)

And then, after the following six months, you would:

  • Have earned $106 in interest ($1 extra due to the $100 in interest from the first six month’s interest being added to the principal and $5 extra due to the principal “step-up” due to inflation)
  • Increased your principal by $530 (assuming inflation rose 5% over the second six-month stretch)

Sound interesting? Here’s a closer look at how they work with pros and cons.

The basics of TIPS

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  • Tips are issued in terms of five, 10, and 30 years.
  • They can be sold at maturity or anytime before.
  • There is a minimum purchase of $100.
  • TIPS pay interest, and the principal adjusts for inflation twice a year.
  • TIPS are tied to the Consumer Price Index (CPI).

No one investment decision should be made on any singular data point. Investments typically have multiple goals and the right mix of assets is dependent on a wide variety of factors.

Assuming that you feel that you need inflation protection as part of your diversified investment portfolio, here are some of the pros and cons of TIPS.

Pro: Low Risk of Default

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TIPS are backed by the “full faith and credit of the U.S. government.” If the lender (the U.S. federal government) defaults on this loan, we’d have much, much larger problems than simply trying to secure our retirement.

Con: No Downside Protection

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TIPS are not without risk. The principal is guaranteed to grow if inflation rises. However, TIPS do not offer downside protection. If inflation turns to deflation, then your principal will adjust downward. This has happened twice in recent history: back in 2007 and more recently in mid-2020.

Pro or Con, Depending on Your Situation: Taxes

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Any increase in your principal and all interest payments are subject to federal tax in the year the gains occur.

When your TIPS matures or is sold, you will only pay federal tax on the current year increases. However …

Pro: You can hold them in an account of your choice

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Unlike other inflation hedges provided by the U.S. government (namely I-Bonds, which were gaining notoriety in late 2021), you can purchase TIPS through a brokerage. As such, you can hold them in tax-advantaged accounts, such as Roth accounts or IRAs.

Con: Unpredictable

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Because returns are dependent on inflation, it is hard to estimate how these investments will perform.

Con: Liquidity

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You can sell your TIPS at any time. However, they do not trade as much as other kinds of bonds, which can make cashing out on cue difficult.

Con: CPI Is Not Always the Best Measure of Inflation

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TIPS are tied to the Consumer Price Index (CPI). The CPI is often criticized for understating the true rate of inflation, especially as experienced by older Americans.

Con: Questionable Performance

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TIPS often do worse than traditional Treasurys, especially in deflationary periods. And, TIPS are more volatile than cash.

Who Should Buy TIPS and When

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There are no “shoulds” in investing or financial planning. It is a matter of figuring out what is right for you and your goals.

That being said, there are a few ways to determine if TIPS are right for you.

Watch Break-Even Inflation Rates

The break-even inflation rate is the rate of inflation when a TIPS and a conventional bond of the same maturity would deliver the same returns at maturity.

Here is an example from Fidelity: “If a 5-year TIPS yielded −1.69% while a conventional 5-year Treasury bond paid 0.59% as of December 1, 2021, the breakeven for the 5-year bonds would be 2.28%. If actual inflation exceeds the break-even rate in the future, the adjustment to the TIPS will eventually provide a higher real return than the conventional bond. However, if inflation comes in lower than the break-even rate, the conventional bond will provide a better return.”

Reasonable for Conservative and Income-Focused Investors

If your primary objective for your investment is to protect a sum of your money from inflation, then TIPS can be a good option.

Does the CPI Reflect Your Personal Spending?

As discussed above, the CPI does not do a great job of reflecting the actual cost increases experienced by most Americans — especially middle and older-aged households.

If your increases in spending match the CPI, then TIPS might be a good option for you. However, if you are experiencing more inflation than reported by the CPI, TIPS might not be the best way to keep pace with inflation.

Inflation Busting Alternatives to TIPS

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TIPS are certainly not the only way to protect your money from inflation. Here are four other options:

Have a Plan

Use the NewRetirement Planner to run scenarios for general and medical inflation rates. See how your finances weather different inflation forecasts and build backup plans if inflation impacts your out-of-money age.

Maintain the Right Mix of Assets

TIPS supposedly keep pace with inflation. However, stocks and mutual funds typically outpace inflation, and they may even benefit from inflation. A well-diversified portfolio of investments is more important than having money in any one type of financial vehicle.


I-Bonds are another inflation-hedge offered by the U.S. Federal government that work differently than TIPS. They provide two returns, a fixed percent return (now near 0%), and a return based on inflation that is recalculated every six months. The minimum that the inflation portion of the return can be is 0%, so deflation will not hurt your principal. However, they must be bought and held only through Treasury Direct and you can only purchase $10,000 per calendar year.

Don’t Rush to Pay Off Your Mortgage

Low-interest debt is not a bad use of your financial interests during periods of inflation. Why? Well, the inflation-adjusted value of your mortgage payments declines at the same rate as inflation rises.

The value of money — including debt — lowers as inflation goes up.

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