Treasury Inflation-Protected Securities (TIPS) are marketable U.S. Treasury bonds whose principal is adjusted for inflation or deflation using the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (CPI-U), published by the Bureau of Labor Statistics. Their coupon rate is fixed when each security is auctioned, but the dollar amount of each interest payment changes because the rate is applied to the inflation-adjusted principal.
TIPS pay interest every six months and are designed to be held to a stated maturity date. At maturity, the Treasury pays the greater of the adjusted principal or the original principal. That protection is a maturity-redemption rule, not a guarantee that you can sell at a profit before maturity.
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What are TIPS?
A TIPS is a Treasury marketable security with two linked components: a fixed interest rate and a principal balance that moves with CPI-U. The fixed rate is set at auction and remains unchanged for the life of that issue. Inflation does not make the stated coupon rate float. Instead, inflation changes the principal to which that fixed rate is applied.
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1Repair Windows errors before they cause bigger problems2Fix the driver behind crashes, sound loss and screen glitches3Clear out junk files and repair common Windows errorsTreasuryDirect describes the central feature this way: “The principal (called par value or face value) of a TIPS goes up with inflation and down with deflation.” Because TIPS are marketable, an owner can generally sell one in the secondary market before its maturity date. The sale price then reflects current market conditions and can be higher or lower than the amount originally paid.
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Treasury currently lists 5-year, 10-year and 30-year TIPS terms. TreasuryDirect lists a $100 minimum purchase and $100 purchase increments for electronic TIPS. Those are issuer terms, not a promise about a particular auction price or the value of a security later sold in the market.
How the TIPS mechanism works
1. The Treasury sets a fixed coupon rate at auction
Each issue has an annual interest rate determined at auction. Treasury’s auction guidance says the rate “remains fixed throughout the term of the security.” A holder therefore knows the percentage rate, but not the future dollar amount of each coupon payment, because the payment base will be adjusted over time.
2. Treasury applies a CPI-U index ratio to principal
Treasury calculates an index ratio from the non-seasonally adjusted CPI-U. The ratio is used to convert the original principal into the adjusted principal for a payment date. When the index ratio is above 1, inflation has increased the adjusted principal. When it is below 1, deflation has reduced it.
The adjustment is tied to the CPI-U series rather than to an individual household’s expenses, a local price index or a seasonally adjusted CPI measure. The CPI-U is a national index published by the Bureau of Labor Statistics, so a TIPS adjustment may not match the price changes any particular investor experiences.
3. The fixed rate is applied to adjusted principal
TIPS pay interest twice a year. A standard semiannual calculation is:
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semiannual interest = adjusted principal × (annual coupon rate ÷ 2)
As adjusted principal rises, the dollar coupon generally rises even though the percentage rate does not. If deflation lowers adjusted principal, the dollar coupon can fall. The payment is not calculated on the original face value unless the adjusted principal happens to equal it.
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4. Treasury redeems principal at maturity
At maturity, Treasury compares the inflation-adjusted principal with the original principal. The investor receives whichever is greater. TreasuryDirect states: “When a TIPS matures, you get either the increased (inflation-adjusted) price or the original principal, whichever is greater.”
If cumulative inflation has increased principal, the adjusted amount is paid. If deflation has pushed the calculated amount below the original principal, the maturity payment uses the original amount instead. This floor applies when Treasury redeems the security at maturity; it does not set a guaranteed price for an earlier sale.
A TreasuryDirect calculation example
Treasury’s worked example starts with $1,000 of original principal. An index ratio of 1.01165 produces adjusted principal of $1,011.65. The example then uses a 0.125% annual coupon. Half of that rate is 0.0625%, so the semiannual interest is approximately $0.63:
$1,011.65 × 0.000625 ≈ $0.63
These figures illustrate the method only. They are TreasuryDirect example inputs, not a current yield, current auction rate or forecast of future payments. A different index ratio or coupon rate would produce a different payment.
What inflation and deflation do to a TIPS
During inflation
When CPI-U rises, the index ratio increases and the adjusted principal increases. The fixed coupon rate is then applied to that larger balance, so later semiannual interest payments can be larger in dollar terms than earlier ones. If the security is held to maturity, the increased adjusted principal is the amount used for the redemption calculation when it exceeds the original principal.
During deflation
When CPI-U falls, adjusted principal decreases and the next interest calculation uses the smaller balance. The coupon rate itself does not change. A sequence of deflationary adjustments can therefore reduce interim coupon dollars and produce an adjusted principal below the amount originally invested.
The maturity floor means Treasury will pay at least the original principal at maturity under the stated redemption rule. It does not reverse every interim coupon reduction, and it does not prevent the market value from falling before maturity.
Why an early sale is different from holding to maturity
TIPS are marketable securities, so an investor may sell before the stated term ends. A secondary-market buyer prices the security using factors such as prevailing interest rates, inflation expectations, the issue’s remaining term and supply and demand. The amount received can therefore differ from both the original purchase price and the current inflation-adjusted principal.
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If market interest rates rise after purchase, an existing fixed-rate TIPS can become less attractive than newly issued securities with higher rates, putting downward pressure on its market price. A sale can produce a capital gain or loss even when the maturity redemption rule would have protected the original principal. Conversely, a sale price can be above the amount paid if market conditions are favorable.
For that reason, statements that a TIPS investor “cannot lose money” are incomplete. The principal floor is a feature of Treasury’s payment at maturity. It is not an insurance policy against a loss caused by selling early, and it does not guarantee that the total return will exceed inflation after taxes and transaction effects.
How TIPS interest and principal adjustments are taxed
Treasury says TIPS interest is subject to federal income tax when received. The annual inflation-related change in principal can also have federal tax consequences before the security matures. Treasury reports annual principal changes on Form 1099-OID, whether or not the TIPS has reached maturity.
This creates a potential timing mismatch in a taxable account: an inflation adjustment can increase the amount reported for federal tax purposes even though the related principal has not yet been paid in cash. Coupon payments, a principal adjustment and the result of a later sale can each have different tax reporting implications. The exact treatment depends on current Internal Revenue Service rules and the investor’s circumstances.
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TreasuryDirect says earnings on Treasury marketable securities are exempt from state and local income taxes. Federal taxation, information reporting and the treatment of a sale can change with tax law, so investors should verify current IRS guidance and consult a qualified tax professional rather than treating this overview as individual tax advice.
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TIPS and Series I savings bonds: similar goal, different design
Both TIPS and Series I savings bonds are intended to incorporate inflation protection, but they do it in different ways. The following comparison uses Treasury’s descriptions and avoids treating either product as a substitute for the other in every situation.
| Feature | TIPS | Series I savings bonds |
|---|---|---|
| What changes with inflation | The principal is adjusted using CPI-U; the fixed coupon is applied to the changing principal. | An inflation component contributes to a composite rate that changes every six months. |
| When interest is paid | Interest is paid every six months. | Earnings accrue and are generally paid when the bond is redeemed. |
| Available terms | Treasury currently lists 5-, 10- and 30-year terms. | Treasury rules include a required holding period and restrictions on early redemption; verify current terms before buying. |
| Ability to sell or redeem early | Can be sold before maturity in the secondary market, at a market price that may create a gain or loss. | Redeemed under savings-bond rules rather than sold as a marketable security; an early-redemption penalty can apply. |
| Tax reporting timing | Annual principal changes may be reported on Form 1099-OID before maturity. | Earnings generally are reported when redeemed under the applicable savings-bond tax method. |
| Principal mechanics | Fixed coupon rate multiplied by inflation-adjusted principal. | Composite rate combines a fixed component and an inflation component. |
Purchase limits and other Series I rules can change, so check current Treasury guidance if those details determine your choice. The key distinction is cash flow and tradability: TIPS deliver scheduled semiannual coupons and have a secondary-market price, while I bond earnings ordinarily accumulate until redemption.
What to check before buying or selling TIPS
- Time horizon: Decide whether you can hold through maturity. A shorter holding period exposes you to the secondary-market price rather than the maturity principal rule.
- Cash-flow needs: TIPS pay coupons twice a year, but the dollar amount can change as principal is adjusted.
- Taxable-account impact: Account for possible federal tax reporting on annual principal adjustments, including adjustments for which no cash has yet been received.
- Inflation measure: The adjustment follows national, non-seasonally adjusted CPI-U, not your personal spending pattern.
- Price versus principal: Separate the security’s adjusted principal from its market value. They are not interchangeable when you sell before maturity.
- Issue details: Confirm the term, coupon, maturity date and purchase price for the specific issue. Treasury’s general 5-, 10- and 30-year listing does not describe every individual auction result.
Common misunderstandings
“The coupon rate rises with inflation.”
No. The coupon percentage is fixed at auction. Inflation changes the principal balance used in the interest calculation, which can change the dollar payment.
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No. The floor applies when Treasury redeems the TIPS at maturity. An early sale occurs at the market price available then.
“Deflation eliminates all interest.”
No. Interest continues to be calculated using the fixed rate and the adjusted principal. Deflation can reduce the principal base and therefore reduce the dollar coupon, but it does not make the stated rate float or automatically become zero.
“No cash was received, so no tax issue exists.”
Not necessarily. Treasury says annual principal changes may be reported on Form 1099-OID before maturity, creating a possible federal-tax liability before the related principal is paid.
Bottom line
TIPS combine a fixed auction-set coupon with a principal balance indexed to CPI-U. Inflation can raise both adjusted principal and subsequent coupon dollars; deflation can lower them. Treasury’s greater-of-original-or-adjusted-principal rule applies at maturity, while any earlier sale is exposed to market-price risk. The products can provide inflation-linked Treasury exposure, but their cash-flow pattern, marketability and tax timing differ materially from Series I savings bonds.
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