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Treasury Inflation Bonds

In today's volatile economy many investors are attracted to the security of the 30 year government bonds. The bond receives the baking of the US government so the bond holder is virtually guaranteed a return on their investment. 30 year government bonds do offer lots of security but the pay offs can actually loose the bond holder money. First of all the interest payments that are made twice per year are not exempt from federal taxes in some instances. Second, the low rate of interest that the bonds generate sometimes does not keep up with the cost of living. When the bond matures sometimes it is worth less in real terms that what it was a t time of purchase.

An alternative is Treasury Inflation Bonds or TIPS. Treasury inflation bonds are purchased at auction which is also where the rate of interest is set. They operate in a similar manner to government bonds except for two main components. First the terms are shorter. Tips are usually sold in terms of 5, 10 and 20 years. Second, TIPS are adjusted to account for inflation. In theory, each interest payment you receive will be larger due to the cost of living going up.

There is a downside to the Treasury Inflation Bonds. While they will increase in times of inflation they will decrease during times of deflation. The recent recession is an example. Interest rates fell and the actual cost of living dropped. This factor had a significant impact on the value of treasury inflation bonds.

Those that purchase the bonds over a long period of time also run the risk of encountering a period of deflation. Remember they can be purchased for 20 year terms. Such a long period of time leaves the bond holder vulnerable to economic slowdowns and collapse.

When it comes to investing, bonds can represent a safe option. Their backing reduces their risk but again can reduce their pay off. Inflation bonds can generate a bit more income in times of economic growth and inflation. However they can seriously backfire should the economy take a turn for the worse.

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192.168.1.1|192.168.1.1|192.168.1.1|192.168.1.1 said:

Their backing reduces their risk but again can reduce their pay off. Inflation bonds can generate a bit more income in times of economic growth and inflation. However they can seriously backfire should the economy take a turn for the worse.

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This factor had a significant impact on the value of treasury inflation bonds.

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