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Choose a nominal Treasury when fixed-dollar payments best match a known expense; consider Treasury Inflation-Protected Securities (TIPS) when you want principal and interest payments linked to U.S. inflation as measured by CPI-U. Neither is universally better: compare similar maturities, yields, how long you expect to hold the security, and the tax treatment. TIPS’ principal floor applies at maturity—not to an early sale.
How nominal Treasury notes and bonds work
Treasury notes are offered at 2, 3, 5, 7, and 10 years; Treasury bonds are long-term securities offered at 20 or 30 years. Both pay interest every six months, at a coupon rate set at auction. The principal is fixed in nominal dollars. Treasury’s overview of marketable securities lists these types and maturities; offerings and auction schedules can change.
A fixed coupon does not mean the security’s market price stays fixed. When market yields rise above a bond’s coupon, its price generally falls below face value; when yields fall below the coupon, its price generally rises above face value. If you sell before maturity, the price you receive may therefore be more or less than the amount you invested. Treasury explains the relationship between pricing, coupon rates, and yields in Understanding Pricing and Interest Rates.
How TIPS work—and what inflation protection means
Treasury offers TIPS at 5-, 10-, and 30-year terms. Their coupon rate is set at auction, but Treasury adjusts principal using non-seasonally adjusted U.S. City Average All Items CPI-U, an index published monthly by the Bureau of Labor Statistics. Inflation increases adjusted principal; deflation decreases it. The rate stays fixed, while the dollar amount of each six-month interest payment changes because it is calculated on adjusted principal. Treasury describes the terms on its TIPS page and in its summary of TIPS auction rules.
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This is protection tied to CPI-U, not a promise to match the price changes in your own household’s spending basket. At maturity, Treasury pays the greater of the inflation-adjusted principal or the original principal. If you sell earlier, that maturity floor does not protect the sale price: TIPS market prices can move, including downward, as interest rates and market conditions change. Treasury discusses early sales and market valuation in its TIPS publication.
A TIPS coupon rate is not the same as its yield or its real yield. The coupon determines the interest calculation; the yield reflects the price paid and the security’s payment stream. A TIPS can have a negative real yield at auction even though its coupon rate is positive. Treasury defines real yield in relation to payments in constant dollars in its pricing and interest-rate explanation.
Compare the features that affect your decision
| Feature | Nominal Treasury notes and bonds | TIPS |
|---|---|---|
| Principal before maturity | Fixed in nominal dollars | Adjusted with CPI-U; may rise or fall |
| Coupon | Fixed rate, with interest paid every six months | Fixed rate applied to adjusted principal; dollar payments vary |
| Inflation exposure | Inflation can reduce the purchasing power of fixed-dollar payments | Principal and coupon dollars adjust with CPI-U |
| Amount paid at maturity | Face amount | Greater of adjusted principal or original principal |
| Early sale | Market price can be above or below face value | Market price can fluctuate; maturity floor does not set an early-sale price |
| Federal tax timing | Interest is federally taxable | Interest and annual inflation adjustments are federally taxable |
| Useful yield comparison | Nominal yield for a maturity suited to your time horizon | Real yield for a similar maturity and CPI-U-linked cash-flow exposure |
Treasury interest is exempt from state and local income taxes. Tax details and reporting are explained on TreasuryDirect’s tax forms and withholding page.
Use breakeven inflation as a rough comparison, not a forecast
A common first-pass measure is the nominal Treasury yield minus the real yield on a TIPS of similar maturity. The difference is often called breakeven inflation or market inflation compensation. It can help frame the choice: if inflation over the relevant period is higher than that difference, TIPS may outperform the matched nominal security before taxes and other differences; if inflation is lower, the nominal security may outperform.
Breakeven is not a prediction or a guaranteed return threshold. Market yields also reflect factors such as liquidity and risk premia, so the difference is not a pure reading of expected inflation. The comparison is meaningful only when maturities are similar; contrasting a short TIPS with a long nominal bond mixes inflation exposure with different interest-rate sensitivity. No live yield or breakeven figure is included here because those values change over time.
Match the security to the expense and holding period
- Known nominal expense on a known date: A maturity-matched nominal Treasury may suit an obligation stated in fixed dollars, provided you can hold it to maturity and its payments align with your cash-flow needs.
- Concern about CPI-U purchasing power: A TIPS with a maturity near your planning horizon can link principal and coupon dollars to that index.
- You may need the money early: Either security can be worth less than its purchase price when sold. Consider whether you can tolerate a market-price loss rather than relying on the maturity payment terms.
- Uncertain spending needs: Distinguish an individual security held to maturity from a bond fund. A fund’s holdings and duration can change, so it does not promise the same maturity payment as a specific Treasury security.
These are ways to evaluate payment structure and risk, not personalized investment advice. U.S. Treasury credit risk is distinct from inflation, interest-rate, reinvestment, liquidity, and early-sale risks.
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Understand TIPS taxes before choosing an account
TreasuryDirect says federal tax applies to TIPS interest and annual inflation adjustments. It reports inflation-protection gains or losses on Form 1099-OID even when principal has not matured and the adjustment has not been received in cash. That timing can create taxable income without a corresponding cash payment, commonly called phantom income. Treasury interest is exempt from state and local income taxes. Individual tax outcomes depend on circumstances; consult current official tax guidance or a qualified tax professional.
Where to buy and what not to confuse with TIPS
Treasury marketable securities can be bought at auction or in the secondary market through TreasuryDirect, banks, brokers, or dealers, and can be sold before maturity. Current auction terms, yields, and secondary-market prices are time-sensitive; check the relevant platform and Treasury notices before acting. Treasury’s marketable securities FAQs cover buying, selling, and transferability.
TIPS are marketable securities, not Series I savings bonds. I Bonds are non-marketable savings bonds with different purchase, redemption, payment, and tax rules. Treasury explains the distinction in its comparison of TIPS and Series I savings bonds.
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