A TIPS Primer

With inflation rising, more investors are looking at Treasury Inflation-Protected Securities (TIPS). This article from Charles Schwab & Co. is a review of TIPS, how to use them, and what to expect from them.

The current level of inflation isn’t the only factor to consider when investing in TIPS. How much are you paying for that inflation protection that TIPS offer? That’s an important factor, as well.

One way to evaluate the relative attractiveness of a TIPS is to compare its yield to the yield of a traditional (non-inflation-protected) Treasury. TIPS generally offer lower yields than Treasuries, because their principal values (and therefore coupon payments) rise with the level of inflation. Because the principal value of a traditional Treasury is fixed, the effects of inflation can eat into an investor’s return.

The difference in the two yields is called the breakeven rate. The breakeven rate is what inflation (measured by the CPI-U) needs to average over the life of that TIPS for its total return to break even with the total return of the traditional Treasury.