April 2024 – Treasury Inflation-Protected Securities (2024)

FAQs

Are tips a good investment in 2024? ›

TIPS may be a sound investment to protect against inflation, but they're not wealth-building tools like stocks. March 22, 2024, at 3:47 p.m. If you're worried about inflation, TIPS can be a good choice – just don't count on them for big gains.

Lower yield: TIPS usually pay lower interest rates than other government or corporate securities, so they are not necessarily optimal for income investors. Their advantage is mainly inflation protection, but if inflation is minimal or nonexistent, then their utility decreases.

TIPS are a type of Treasury security whose principal value is indexed to inflation. When inflation rises, the TIPS' principal value is adjusted up. If there's deflation, then the principal value is adjusted lower.

TIPS Are Liquid. You can buy and sell TIPS in the secondary market before maturity. Of course, the value of a security sold in the secondary market before maturity is subject to market valuation. This may result in either a capital gain or loss, depending on the prevailing market price at the time of the sale.

And just like conventional Treasury bonds, TIPS are impacted by movements in the interest rate marketplace. If Treasury yields increase because of rising inflation, TIPS are hedged. But if yields increase because of rising real yields, as we have right now, TIPS are susceptible to losses.

TIPS typically pay lower interest rates than other securities, so they aren't the best choice for an investor with a fixed income. TIPS also comes with an interest rate risk. During deflation, the investor will either lose the interest earned or not earn anything.

The problem is that over time, inflation will still eat away at the value of that bond. That's especially an issue for long term bonds. TIPS solve for that problem by adjusting the amount due to investors based on changes in the consumer price index. This means that investors get paid more as inflation rises.

Key Takeaways

Treasury inflation-protected securities (TIPS) are U.S. government bonds that are indexed to inflation. As a result, many investors look to these securities when inflation heats up. TIPS, however, frequently underperform traditional Treasuries, particularly when inflation is low.

Bottom line. If inflation and investment safety are your chief concerns — TIPS and I-bonds deliver both. TIPS offer greater liquidity and the higher yearly limit allows you to stash far more cash in TIPS than I-bonds. If you're saving for education, I-bonds may be the way to go.

TIPS allows you to park your cash during a recession and help preserve its value. The face value of TIPS goes up or down with inflation or deflation. During a non-inflationary time, your investment earns the interest rate offered when purchased.

Are tips riskier than Treasuries? ›

While TIPS have no default risk – or more accurately, as little default risk as U.S. nominal Treasury bonds – they are not risk-free in nominal terms, because their index ratios can adjust down in times of deflation (though the principal paid back by TIPS can never fall below the original bond principal amount).

Individual TIPS guarantee an inflation-adjusted return if held to maturity, but there is no guarantee for a fund; a portfolio manager may buy or sell TIPS before maturity, which could lead to gains or losses.

If the principal is equal to or lower than the original amount, you get the original amount. TIPS pay a fixed rate of interest every six months until they mature.

The No. 1 advantage that T-bills offer relative to other investments is the fact that there's virtually zero risk that you'll lose your initial investment. The government backs these securities so there's much less need to worry that you could lose money in the deal compared to other investments.

Real assets include the so-called hard assets of real estate, infrastructure and natural resources, and sometimes Treasury Inflation Protected Securities (TIPS) when the definition of real assets includes inflation mitigation.

TIPS allows you to park your cash during a recession and help preserve its value. The face value of TIPS goes up or down with inflation or deflation. During a non-inflationary time, your investment earns the interest rate offered when purchased.

At an initial rate of 4.28%, buying an I bond today gets roughly 1% less compared to the 5.25% 12-month Treasury Bill rate (May 1, 2024). You could say that buying an I Bond right now is a 'fair deal' historically compared to 2021 & 2022 when I Bond rates were much higher than comparable interest rate products.

For those preparing for or already in retirement, this is especially good news. Buying individual TIPS that mature across different years — a strategy known as building a TIPS ladder – can help you lock in a stream of inflation-adjusted income for as long as 30 years.