What are the advantages of inflation-indexed Treasuries (TIPS) and how do they work?
Written by John Montgomery , Bond Market Analyst The U.S. Treasurys inflation-indexed notes and bonds are an investors best protection against a jump in the cost of goods and services, the arch enemy of most fixed-income investments such as conventional Treasuries, municipal bonds and corporates. Why the arch enemy? Because inflation erodes the value of the steady income you get from conventional bonds. If youre getting 5% on a bond and the price of goods and services that you buy is rising at 3%, youre getting a real return of 2%. If inflation rises, your real return goes down even more. While inflation has been subdued for some time now – growing at modest rate of about 2% – it has not yet been abolished despite the best efforts of the Federal Reserve. In fact, it was the fear of inflation that prompted the Fed to raise short-term interest rates six different times between June, 1999, and May, 2000. Inflation-indexed notes and bonds (TIPS, for short) protect against inflation by adju
