Are TIPS Riskier or Safer than Nominal Treasuries?

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TIPS offer inflation protection, but at the cost of higher volatility and lower returns in bad times (when inflation is low). TIPS behave somewhere between corporate bonds and nominal Treasuries.

With the exception of the post-COVID blip, inflation in the U.S. has been moderate since the early 1980s. However, as the below chart shows, in the post-war era, inflation ran almost as high as 15% following the oil price shocks of the 1970s. Hedging against unexpected inflation is, therefore, always high on the list of investor priorities. One of the main inflation hedges available to U.S. investors are Treasury Inflation-Protected Securities, or TIPS.

year over year

TIPS are U.S. government bonds whose principal and coupon payments are tied to the rate of inflation. TIPS, like regular Treasury bonds, are backed by the full faith and credit of the United States. When inflation goes up, TIPS principal and coupon payments rise with the percent change in inflation, and when inflation falls, TIPS principal and coupon payments fall alongside. According to the TreasuryDirect website:

The principal (called par value or face value) of a TIPS goes up with inflation and down with deflation.

When a TIPS matures, you get either the increased (inflation-adjusted) price or the original principal, whichever is greater. You never get less than the original principal.