Inflation protected bonds, also known as TIPS (which stands for Treasury Inflation Protected Securities) are issued by the U.S. Government.
How Does An Inflation Protected Bond Protect You From Inflation?
The principal value of an inflation protected bond is adjusted upward or downward based on changes in the Consumer Price Index, which is the formal measure of inflation in the United States.
Inflation protected bonds pay a fixed rate of interest twice a year. If the principal is adjusted up due to inflation then the fixed interest rate will be applied to the new higher principal amount, and so a higher dollar amount of interest will be paid out. This means if you own an inflation protected bond, and there is inflation, you would see an increase in the interest income you receive from the bond.
How Does An Inflation Protected Bond Fund Work?
Inflation protected bonds funds buy and sell inflation protected bonds for you, collect the interest, and pay it out to you. They make a convenient alternative to trying to buy individual bonds on your own.
Where Can I Buy Inflation Protected Bonds or Bond Funds?
To find a specific fund check out Morningstar’s list of Top 25 Inflation Protected Bond Funds.
You can also buy inflation protected bonds directly from the U.S. Treasury through Treasury Direct.
