Treasury Inflation Protected Securities (TIPS) are experiencing renewed interest as investors look for ways to shield their portfolios from the effects of inflation. These securities are designed to protect investors from inflation by adjusting their principal value based on changes in the Consumer Price Index (CPI).

The principal of a TIPS increases with inflation and decreases with deflation, as measured by the CPI. When a TIPS matures, the investor receives the adjusted principal or the original principal, whichever is greater. TIPS also pay interest twice a year, based on a fixed rate applied to the adjusted principal.

Several factors are contributing to the increased demand for TIPS:

• Inflation Concerns: Rising inflation rates are prompting investors to seek assets that can maintain their purchasing power.
• Market Volatility: In times of market uncertainty, TIPS are seen as a relatively safe haven.
• Diversification: TIPS can provide diversification benefits to a portfolio, as their returns are not highly correlated with other asset classes.

While TIPS offer inflation protection, it’s important to consider potential drawbacks:

• Real Interest Rates: TIPS typically offer lower real interest rates compared to nominal Treasury securities.
• Tax Implications: The inflation adjustment to the principal is taxable in the year it occurs, even though the investor does not receive the cash until the TIPS matures or is sold.

Investors should carefully evaluate their individual circumstances and risk tolerance before investing in TIPS. Consulting with a financial advisor can help determine whether TIPS are an appropriate addition to a portfolio.