What are Inflation Linked Bonds?
Inflation Linked Bonds, in the U.S. often called “TIPS” (Treasury Inflation Protected Securities), represent a distinct asset class in which both principal and interest payments adjust to track changes in designated inflation indices. For TIPS, the indexed principal amount is adjusted to reflect changes in the non-seasonally adjusted Consumer Price Index-All Urban Consumers (CPI-U). A fixed rate of interest (real yield) is then paid on this increasing principal amount. The principal, upon redemption, moves with changes in inflation and the cash coupon also increases or decreases with inflation. This adjustment process means that ILBs can be a hedge against inflation, especially if held to maturity. They have also historically offered portfolio diversification, since their returns have not been highly correlated with stocks and nominal bonds. How Large are the Inflation Linked Bond Markets? With the Treasury Department continuing to commit to future issuances of TIPS, we expect that the
