Inflation Treasury Bonds

Inflation Treasury Bonds or Treasury Inflation-Protected Securities (TIPS) are bonds which provide protection against inflation. Issued by the U.S. Treasury, TIPS are inflation-indexed bonds. The Consumer Price Index (CPI) is a commonly used measurement for inflation. The CPI is not based on a general price index, but upon an estimated cost of living index--the estimated expenses of those goods and services necessary to the running of American households. Some of these necessary goods include housing, clothing, and food; one example of necessary services includes utilities. The CPI is based on the rising or decreasing prices of these goods and services which the average consumer will purchase with a percentage of his or her income.

The coupon rates of Treasury Inflation-Protected Securities are paid every six months. Since this coupon rate is a percentage of the principal value, the income amount may be different every 6 months, as the principal value adjusts with the change in the CPI. Although the coupon rate on TIPS will be constant, the amount of interest will differ when it is multiplied by the inflation-adjusted principal. This will protect the bond holder from the effects of inflation.

The U.S. Treasury first offered these inflation-indexed bonds on January 29, 1997, which were designed to protect the investor from inflation. The bonds became extremely popular as investors placed bids for $37.2 billion of the securities which was five times the amount offered.

Although TIPS can be bought through a broker or bank, the least expensive manner of purchase is through the government directly. TIPS can be bought electronically through the Treasury Direct. The Treasury Direct will allow the investor to purchase with a "noncompetitive bid" which denotes acceptance of the investment yield determined at auction. These Inflation Treasury Bonds are also offered in five year, ten year and twenty year maturities. The inflation-indexed bonds may be purchased in $100 increments with a minimum purchase of $100.

Since U.S. Treasuries are considered among the safest investments in the world, TIPS is a good investment option for the investor who wishes to protect his/her money's purchasing power. The real rate of return (representing the growth of purchasing power) is guaranteed. TIPS, however, only offer a low return because of the safety of the bonds. Many countries also have Inflation Treasury Bonds or securities; one example is the nation of Canada in which these bonds are known as "real return bonds" (RRB).