TIPS Bonds – Treasury Inflation-Protected Securities

Are you looking for a safe investment that will outperform the rate of inflation? The stock market has been extremely volatile; so many investors have been cashing their investments out and going into cash and cash equivalent investments. These cash investments are making less than 1% in interest. This means that if you have $100,000 in cash then your yearly interest payment will be only $1,000 or $83 a month. Money market funds and CDs are safe investment but the returns are low. If there is ever any signs of inflation then any investor in only cash investments will see their capital dwindle.Are there any safe investments with a guaranteed rate of return that will always beat out inflation? Well, until 1997 there wasn’t, but the federal government created Treasury Bonds that will guarantee you the specified rate of return plus any inflation incurred while owning the bond. These special Treasury Bonds are called TIPS, which is short for Treasury Inflation-Protected Securities. The main purpose of TIPS Bonds is to make sure that your investment is protected against inflation.Let’s say you placed $10,000 in TIPS with a coupon rate of 3% and another $10,000 in a corporate bond with a coupon rate of 4%. Two years later, inflation increased by 2%, which means the TIPS Bond would pay you the 3% interest specified + an additional 2% in principal from an increase in inflation. The corporate bond would still pay out 4%, but because inflation increased by 2%, your real rate of return is only 2%.TIPS are sold directly through the US Treasury Auctions, so the specified interest rate is based on the performance of the auction. These bonds are offered in 5, 10, and 30 year maturity terms, which means that for the next 5, 10, 30- years you investments will be guaranteed to make to specified interest rate plus additional principal based on the rate of inflation.