Download the Schwab app from iTunes®Close

Is It Time for TIPS?

When the Consumer Price Index (CPI)—a key measure of inflation—jumped 5.4% this past June, some investors may have turned to Treasury Inflation-Protected Securities (TIPS) to help soften the potential blow. After all, TIPS’ principal value is indexed to the CPI, so when inflation rises, their value and interest payments rise as well.

“TIPS are often seen as the antidote to rising inflation,” says Collin Martin, director and fixed income strategist at the Schwab Center for Financial Research. “But like most investments, TIPS have some trade-offs investors shouldn’t overlook.”

Chiefly, TIPS tend to offer lower yields than traditional Treasuries. This is by design: Investors in TIPS accept lower yields because their principal value and coupon payments rise when inflation rises.

That said, it’s important to consider the break-even inflation rate—or the difference in yields of a TIPS and a comparable Treasury—before investing. (The Federal Reserve of St. Louis publishes break-even inflation rates.) In July 2021, for example, the break-even rate for a 10-year TIPS was 2.36%, meaning inflation would need to exceed that rate over the life of the bond in order for the TIPS to outperform a comparable Treasury.1 For context, the CPI surpassed that rate a handful of times over the past decade, but during only one period—from March 2011 through March 2012—did it remain above that reading for longer than a few months.2

“If inflation remains modest going forward, TIPS returns are likely to be held in check,” Collin says. “But for investors who anticipate a period of sustained higher inflation, TIPS are likely one of the best ways to help insulate their portfolios.”

1Federal Reserve Bank of St. Louis, as of 07/13/2021.
2U.S. Bureau of Labor Statistics.

What You Can Do Next

Need help determining if TIPS make sense as part of your fixed income strategy? Call a Schwab fixed income specialist at 877-566-7982.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Treasury Inflation-Protected Securities (TIPS) are inflation-linked securities issued by the U.S. government whose principal value is adjusted periodically in accordance with the rise and fall in the inflation rate. Thus, the dividend amount payable is also impacted by variations in the inflation rate, as it is based upon the principal value of the bond. It may fluctuate up or down. Repayment at maturity is guaranteed by the U.S. government and may be adjusted for inflation to become the greater of the original face amount at issuance or that face amount plus an adjustment for inflation.

Investing involves risk, including loss of principal.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.

Past performance is no guarantee of future results.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.


Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co., Inc. may in its sole discretion re-set the vote count to zero, remove votes appearing to be generated by robots or scripts, or remove the modules used to collect feedback and votes.