Treasury Inflation Protected Securities (TIPS) are government bonds that provide protection against inflation. The principal and interest payments on TIPS adjust with the Consumer Price Index (CPI). As the CPI goes up, so do the payments on TIPS. The CPI measures the average change in prices paid by urban consumers for a fixed market basket of goods and services.
Coupon treasuries are government bonds that make periodic interest payments (coupons) at a fixed rate. The coupons are paid semiannually and the bond matures in 10 years. When the bond matures, you get back your original investment plus interest.
Treasury Inflation Protected Securities (TIPS) provide protection against inflation, while coupon treasuries do not. Over time, inflation erodes the purchasing power of your investment in a coupon treasury, but not in a TIPS.
Assuming a 3% rate of inflation:
– After 10 years, $1,000 invested in a TIPS will be worth $1,349
– After 10 years, $1,000 invested in a coupon treasury will be worth $1,000
In general, TIPS will outperform coupon treasuries when inflation is positive and underperform when inflation is negative or zero.
What are Treasury Inflation Protected Securities (TIPS)?
TIPS are a type of government bond that is indexed to inflation in order to protect investors from the negative effects of rising prices. The principal is adjusted semi-annually according to the Consumer Price Index, and the coupon rate is fixed for the life of the bond. TIPS are available with maturities of 5, 10, and 30 years.
TIPS are issued by the US Treasury in order to provide a safe investment that is not impacted by inflation. Because TIPS are indexed to inflation, they provide a real return (after inflation) that is higher than fixed-rate investments such as regular Treasuries.
There are two main types of TIPS:
TIPS are offered in denominations of $100, $500, $1000, $5000, and $10,000. I-Bonds are offered in denominations of $50, $75, $100, $200, $500, $1000, and $5000.
What are coupon treasuries?
Coupon treasuries are bonds that offer a fixed rate of interest. The principal is guaranteed by the U.S. government, and the interest payments are backed by the full faith and credit of the U.S. government.
See related articles on how to read earnings reports for i-bonds here, or this article regarding treasury yield explained.
How do TIPS and coupon treasuries differ?
While both TIPS and coupon treasuries offer protection against inflation, they differ in how they provide that protection. Coupon treasuries have a fixed interest rate that does not change over the life of the security, while TIPS have an interest rate that is adjusted for changes in inflation. This means that, with TIPS, you will receive more interest payments if inflation increases, and less interest payments if inflation decreases.
Which is better?
There is no simple answer to this question. Both TIPS and coupon treasuries have their own unique benefits and drawbacks. Ultimately, the best option for you will depend on your specific financial goals and needs.
Here is a brief overview of each security type:
TIPS: Treasury Inflation Protected Securities are bonds issued by the US government that offer protection against inflation. The principal value of these securities is adjusted for inflation, so investors are able to maintain the purchasing power of their original investment. TIPS also offer a fixed interest rate, so investors know exactly how much income they will receive from their investment.
Coupon treasuries: Coupon treasuries are bonds that offer a fixed interest rate payments. These securities are not protected against inflation, so the value of your investment may decline if inflation rates increase. However, coupon treasuries typically offer higher interest rates than TIPS, so they can still be a good choice for investors looking to maximize their income.
In general, TIPS provide a higher level of protection against inflation than coupon treasuries. However, there are a few key points to keep in mind when deciding which type of security is right for you. First, TIPS will always have a lower interest rate than coupon treasuries. This is because the principal value of TIPS increases with inflation, providing investors with a real return (after inflation). Coupon treasuries, on the other hand, provide a fixed rate of interest. Second, TIPS are best suited for investors who are looking to protect their purchasing power over the long term. If you need income from your investments or are looking to preserve capital in a time of deflation, coupon treasuries may be a better choice.