Decoding Treasury Inflation Protected Securities (TIP’s)

Why are many of them listed at negative rates of return?

I was having a conversation recently with a friend who had bought an exchange-traded fund that invested in TIP’s. She was concerned because the fund was down slightly from where she had bought it. Her understanding was that TIP’s are treasury bonds, meaning guaranteed by the US Government and that she was also protected against inflation. I explained to her, yes she was correct, with a qualification. If you buy an individual TIP bond as a new issue, and hold it to maturity, your principal is guaranteed, and your principal and interest is indexed to inflation.

As I explained to my friend though, the fund she bought holds TIP’s with an eight-year average maturity. So the way bond math works, if interest rates go up, your eight-year bonds are going to lose some value in the short run, even if they have the inflation protection. What the inflation protection feature does is increase your interest payments (and your ending principal payout) with inflation (as measured by the CPI) over time. If inflation is higher than expected over the next few years, then she will likely do better with her TIP’s fund than she would have in a conventional treasury fund with the same maturity. If it comes in lower, then she would have been better off with the conventional treasuries.

To get a better understanding of how to evaluate these securities, I have pasted below some 5-year offerings of conventional and TIP treasuries from…