Inflation was a defining issue of the 2024 presidential election, with many voters backing now-President Trump after he vowed, “Starting on day one, we will end inflation and make America affordable again.” Yet, weeks into his presidency, inflation remains stubbornly persistent. As of February 2025, the annual inflation rate sits at 3%—half a percentage point higher than the previous month and still above the Federal Reserve’s 2% target.
While rising prices continue to squeeze household budgets, they’re also a major concern for investors—especially those nearing or in retirement—who fear that persistent inflation will erode the value of their hard-earned savings. This has led many investors to consider Treasury Inflation-Protected Securities (TIPS), a type of U.S. government bond designed to keep pace with inflation.
Indeed, interest in TIPS has grown amid concerns that some of the Trump administration’s proposed policies may fuel further inflation. Adding to their appeal, yields on 30-year TIPS recently hit a 23-year high of 2.403%. This means investors would lock in a guaranteed return of 2.403% above the official U.S. inflation rate for the next 30 years—a level of inflation-protected income not seen in over two decades.
But are TIPS the right move for your portfolio? Before jumping in, here’s what you need to know about how these securities work, their potential benefits, and the risks to consider.
WHAT ARE TREASURY INFLATION-PROTECTED SECURITIES (TIPS)?
Treasury Inflation-Protected Securities (TIPS) are a type of U.S. government bond designed to help investors keep pace with inflation. Unlike traditional Treasury bonds, which have a fixed principal value, TIPS are uniquely structured so that their principal adjusts with changes in the Consumer Price Index (CPI)—a primary measure of inflation in the U.S.
Here’s how it works: When inflation rises, the principal value of a TIPS bond increases accordingly. Since interest payments are calculated as a fixed percentage of that principal, investors receive higher interest payments as inflation climbs.
On the flip side, if inflation cools—or turns into deflation—the principal adjusts downward, and interest payments shrink. However, at maturity, investors will receive at least their original principal, even if deflation occurs.
Investors can purchase TIPS directly from the U.S. Treasury or through the secondary market in varying maturities (5, 10, and 30 years). It’s also possible to gain exposure through exchange-traded funds (ETFs) or mutual funds that invest in a basket of TIPS.
KEY BENEFITS
TIPS offer a unique set of advantages that make them an attractive option for investors looking to protect their portfolios from inflation.
One of the biggest benefits is their principal adjustment feature. Unlike traditional bonds, which can lose purchasing power as inflation rises, TIPS automatically increase in value based on changes in the Consumer Price Index (CPI). This means that as the cost of living goes up, so does the bond’s principal—helping investors maintain their real (inflation-adjusted) returns.
Another key advantage is that TIPS provide a guaranteed return above inflation. The bond’s fixed interest rate (or “coupon”) is applied to its inflation-adjusted principal, ensuring that investors earn a real yield over and above rising prices.
Finally, unlike corporate bonds or stocks, which are subject to credit and market risk, TIPS have the backing of the U.S. government, making them one of the safest investments available. For retirees and conservative investors looking for stability—especially in an unpredictable economic environment—this level of security can provide valuable peace of mind.
POTENTIAL RISKS
While TIPS offer valuable inflation protection, they aren’t without risks—some of which can catch investors off guard.
One of the biggest drawbacks is their sensitivity to interest rate changes. Like all bonds, TIPS lose value when interest rates rise. However, because their yields are typically lower than those of traditional Treasury bonds, TIPS can be even more vulnerable to rising rates. This means that if rates climb, the market value of existing TIPS can decline, which is important for investors who may need to sell before maturity.
Another risk is the potential for lower returns in periods of low inflation or deflation. If inflation remains subdued—or worse, turns negative—TIPS may underperform traditional bonds, which offer fixed principal values and higher initial yields. While the government guarantees that investors will never receive less than their original principal at maturity, deflation can still result in lower interest payments throughout the life of the bond.
Additionally, investors should be mindful of the tax implications. TIPS adjustments for inflation are taxed as income in the year they occur, even though investors don’t receive the increased principal until maturity. This so-called “phantom income” can create an unexpected tax burden, making TIPS less tax-efficient for investors holding them in taxable accounts.
TIPS VS. I BONDS: WHAT’S THE DIFFERENCE?
TIPS and I Bonds are both U.S. government-backed securities designed to protect investors from inflation, but they have key differences that impact how and when they should be used in a portfolio.
One of the biggest distinctions is how they adjust for inflation. TIPS have a fixed interest rate, but their principal value fluctuates based on changes in the Consumer Price Index (CPI).
In contrast, I Bonds pay a composite rate that combines a fixed interest rate (set at purchase) with a variable inflation rate that resets every six months. This means TIPS provide real-time inflation adjustments, while I Bonds adjust semiannually based on past inflation data.
Another key difference is taxation. While both are subject to federal tax, I Bonds offer a tax advantage because investors can defer paying taxes on interest until they redeem the bond, whereas TIPS holders must pay taxes annually on inflation adjustments (even if they haven’t received the increased principal). This tends to make I Bonds more tax-efficient, especially in taxable accounts.
Lastly, I Bonds have purchase limits ($10,000 per person per year, with an extra $5,000 through tax refunds). However, investors can purchase TIPS in much larger amounts, often making them a better option for those investing significant sums.
WHO SHOULD INVEST IN TIPS?
TIPS can be a smart investment for those looking to protect their purchasing power, but they aren’t a one-size-fits-all solution.
First, TIPS tend to be most suitable for conservative investors, retirees, or those who prioritize capital preservation over growth. Because TIPS adjust their principal based on inflation, they provide a reliable hedge against rising prices while offering the security of U.S. government backing. Investors holding TIPS in tax-advantaged accounts, such as IRAs or 401(k)s, can also avoid the annual tax burden of inflation adjustments, making them more tax-efficient in those settings.
However, TIPS may not be ideal for everyone. Their lower yields make them less attractive in environments where inflation is stable or declining. And because their market price fluctuates with interest rates, investors who sell before maturity could face losses if rates rise.
For long-term investors focused on wealth accumulation rather than inflation protection, stocks and other higher-growth assets may be a better choice. Equities, in particular, have historically outpaced inflation over longer periods, providing higher real returns. Meanwhile, I Bonds might be a better option for smaller investors or those who want a simpler, tax-friendly alternative.
Beyond TIPS and I Bonds, other ways to hedge against inflation include dividend-paying stocks, real estate, and commodities like gold and oil. These assets often appreciate in value during inflationary periods and provide greater long-term growth potential than TIPS, making them potentially valuable additions to a diversified portfolio.
ARE TIPS RIGHT FOR YOU?
While TIPS can be a useful tool for protecting your portfolio against inflation, they may not be a fit for every investor. Depending on your financial goals, alternatives like I Bonds, equities, real estate, or commodities may offer better inflation protection and long-term growth potential.
Whether you’re considering TIPS or exploring other ways to safeguard your wealth, having a personalized plan is key. Sloan Advisory Group can help you navigate your investment options and design a strategy tailored to your risk tolerance, time horizon, and long-term financial objectives. Contact us today to create a comprehensive financial plan that aligns with your goals.
