Treasury Inflation-Protected Securities (TIPS) are experiencing increased interest from investors looking to protect their portfolios from the erosive effects of inflation. These securities, issued by the U.S. Treasury, are designed to provide a return that keeps pace with 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 at a fixed rate, but the interest payment amount varies because it is applied to the adjusted principal.

Several factors are contributing to the rising popularity of TIPS:

• Inflation Concerns: With ongoing economic stimulus measures and rising commodity prices, many investors are worried about potential inflation.
• Safe Haven: TIPS are backed by the full faith and credit of the U.S. government, making them a relatively safe investment.
• Diversification: TIPS can provide diversification benefits to a portfolio, as their returns are not perfectly correlated with other asset classes.

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

• Lower Yields: TIPS typically offer lower yields than 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 consider their individual circumstances and risk tolerance before investing in TIPS. Consulting with a financial advisor is recommended to determine if TIPS are an appropriate addition to their portfolio.