TIPS have garnered renewed interest in the last couple of years, particularly during the recent period of higher inflation, which is ongoing. TIPS are a type of US Treasury bond offering and are thus backed by the full faith and credit of the United States government. Along with IBonds, which we will write about in an upcoming newsletter, TIPS are one of the two ways to protect against future inflation.

TIPS can be purchased from TreasuryDirect or your broker (Fidelity, Schwab, etc.), usually at no commission. TIPS can be bought when initially offered "at auction" or in follow-on offerings, also known as "reopening." They can also be acquired from your broker on the secondary market. TIPS pay interest every 6 months based on the coupon rate set when the TIPS are issued and the accrued value of the bond. The "accrued value" represents the bond's worth, adjusted monthly based on U.S. government inflation data. That is how inflation protection works on both the bond's value and the interest payments.

Smarter Bear recommends purchasing TIPS:

1. From your broker as opposed to Treasury Direct, as it offers more flexibility when buying, selling, and re-investing the interest payments.
2. For principle protection and capital preservation as opposed to growth.
3. Inside IRAs, TIPS are not tax-efficient.
4. To match expected future spending needs, the inflation protection will align with the future prices of your purchases.