For U.S. Treasury investors, the key difference is that Treasury Inflation-Protected Securities (TIPS) adjust their principal with inflation, while ordinary nominal Treasury notes and bonds keep principal fixed. TIPS can help protect purchasing power against the U.S. CPI-U index when held to maturity, but their market prices can still fall, and their tax timing and cash flows differ. Inflation-linked bonds in other countries may use different indexes, rules, and tax treatment.
How TIPS and ordinary Treasury bonds work
TIPS adjust principal with CPI-U
Treasury issues TIPS in 5-, 10-, and 30-year terms. Their coupon rate is fixed at auction, but Treasury adjusts their principal using the non-seasonally adjusted U.S. City Average All Items CPI-U published monthly by the Bureau of Labor Statistics. The semiannual interest payment is calculated on the inflation-adjusted principal, so the rate stays fixed while the dollar payment can change.
Principal can decline when the index declines. At maturity, however, Treasury pays the greater of the adjusted principal or the original principal. That maturity floor does not prevent the market price from falling if you sell earlier. Treasury lists a $100 minimum purchase, in $100 increments, and pays interest semiannually. U.S. Treasury: Treasury Inflation-Protected Securities (TIPS)
Nominal Treasury notes and bonds keep principal fixed
Ordinary nominal Treasury notes and bonds pay interest every six months on a fixed principal amount. Their coupon rate is set at auction. A bond’s market price can be above or below its face value depending on its coupon and prevailing yields; when yields rise, an existing bond with a lower coupon may have to sell at a discount. U.S. Treasury: Understanding Pricing and Interest Rates
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What the difference means for returns and cash flow
TIPS are linked to CPI-U, not to an individual household’s personal inflation rate. If your own costs rise faster or slower than that index, the adjustment may not match your experience. Nominal Treasury payments, by contrast, do not rise with inflation, so inflation can erode the purchasing power of both coupon income and principal.
With TIPS, the coupon rate is fixed but applied to adjusted principal. As a result, semiannual interest amounts can rise or fall. Nominal Treasury coupon amounts remain fixed, making them more predictable in dollars but not in purchasing power.
Neither security guarantees a stable resale value. If you sell before maturity, market yields and other market conditions can leave you with less or more than you paid. TIPS’ principal floor applies at maturity, not to an early sale. The SEC’s overview of bond risks includes interest-rate, inflation, credit, liquidity, and call risks; for this Treasury comparison, price movements and inflation exposure are the central considerations. SEC Investor.gov: Bonds
How to read the breakeven inflation comparison
One common comparison is the difference between the yield on a nominal Treasury and the real yield on a TIPS of the same maturity. It is often called the breakeven inflation spread. It is a market-based comparison, not a promise about future inflation or a guarantee that one bond will outperform the other. The spread can reflect factors beyond expected inflation, including differences in liquidity and risk premia.
As of October 6, 2026, the U.S. Treasury’s 10-year nominal par yield was 5.27%, and its 10-year real par yield was 2.91%. Subtracting the real yield from the nominal yield gives an approximate 2.36 percentage-point spread. This is a calculation from the Treasury figures, not a separately published Treasury forecast or a buy/sell signal. The yield-curve figures are indicative par yields based on bid-side quotations, not prices from completed transactions; they change frequently. U.S. Treasury: Daily Treasury Par Yield Curve Rates U.S. Treasury: Daily Treasury Real Yield Curve Rates
For a useful comparison, match maturities and consider how long you expect to hold the investment. A spread is one input, not a forecast that resolves the choice by itself.
Taxes can change TIPS cash planning
Treasury states that TIPS interest and increases in principal are subject to federal tax in the year incurred and are exempt from state and local income taxes. In a taxable account, an inflation-related principal increase may therefore create federal tax before the adjusted principal is paid at maturity. Tax treatment can depend on your circumstances; consult current IRS guidance or a qualified tax professional. U.S. Treasury: Treasury Inflation-Protected Securities (TIPS) U.S. Treasury: TIPS Interest and Taxation
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Which type may fit your situation?
- Consider TIPS if you want Treasury principal adjustments tied to U.S. CPI-U and can hold through maturity, while accounting for variable coupon dollars and possible tax on principal increases before maturity.
- Consider nominal Treasuries if fixed principal and predictable coupon amounts in dollars matter more to you, and you accept that inflation can reduce their purchasing power.
- Compare both using matched maturities, current nominal and real yields, your holding period, and the possibility that you may need to sell before maturity.
TIPS are marketable and can be bought at auction through TreasuryDirect or through banks, brokers, and dealers; they can also be sold in the secondary market. Treasury’s TIPS page gives the security terms and purchase details. U.S. Treasury: Treasury Inflation-Protected Securities (TIPS)
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TIPS are marketable Treasury securities, while Series I savings bonds are a distinct, nonmarketable savings product; the names should not be treated as interchangeable. The CPI-U formula, maturity floor, and tax explanation here describe U.S. Treasury TIPS and should not be generalized to inflation-linked bonds issued by other countries. U.S. Treasury: Comparison of TIPS and Series I Savings Bonds
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