TIPS’ principal is linked to changes in the CPI and “provides an effective hedge against inflation in an investor’s portfolio relative to standard Treasury bonds,” says Morningstar’s Timothy Strauts in an analyst report on iShares Barclays TIPS. “As the CPI rises, the principal in the individual TIPS is adjusted upward. The coupon on the bond is then paid on the higher principal, which raises the overall effective yield of the security,” he said.
“It is important to note that inflation is just one component of interest rates and that changes in the ‘real rate’ or the risk-free cost of capital will cause the value of TIPS to oscillate up or down just like Treasury bonds,” Strauts wrote.
iShares Barclays TIPS
Tisha Guerrero contributed to this article.
Full disclosure: Tom Lydon’s clients own TIP.