Investors looking for decent returns can still find them in Treasury inflation-protected securities (TIPS), but there’s a note of caution for those considering them as a quick fix against inflation. These government bonds, known as TIPS, are designed with real yields that already factor in inflation. The principal of TIPS fluctuates with changes in the consumer price index, which tracks the cost of everyday goods and services. At present, the 5-year TIPS are yielding around 1.6%, while the 10-year and 30-year options offer approximately 2% and 2.3%, respectively.
Recent data showed consumer prices unexpectedly rose in January, with annual inflation hitting 3%. Meanwhile, there’s buzz around how President Donald Trump’s tariffs might be fueling inflation fears. A University of Michigan survey highlighted a drop in consumer sentiment in February, much of it linked to worries about rising prices due to those tariffs. Furthermore, minutes from the Federal Reserve’s January meeting, released recently, shed light on concerns over “upside risks to the inflation outlook,” with particular attention on potential shifts in trade and immigration policies.
When considering TIPS, the important factor is whether you intend to hold them to maturity or plan to trade them on the secondary market, advises Collin Martin, a fixed income strategist at the Schwab Center for Financial Research. You can purchase initial issue TIPS directly from the federal government via Treasury Direct. Additionally, there are TIPS exchange-traded funds with various maturities and durations, though their value can be quite volatile. “TIPS are very appealing at the moment and excellent for inflation protection, but they’re not ideal for short-term hedging,” Martin explains. “Remember, they are bonds at the end of the day. If prices fall, that can negate the inflation protection.”
For example, in 2022 and 2023, as inflation escalated, interest rates shot up rapidly, pulling TIPS prices down in the process. “The decline in prices was significant enough to counteract the inflation adjustment,” Martin notes. The true benefits of TIPS emerge when actual inflation exceeds market forecasts, according to a note from Wells Fargo Investment Institute. “Tariffs might cause temporary price hikes, but the long-term market view on future inflation remains moderate,” observes Luis Alvarado, the firm’s global fixed-income strategist.
Alvarado points out that the breakeven inflation rates—which measure the gap between nominal Treasury yields and TIPS yields—haven’t seen much movement for the five-year and 10-year terms. This suggests that investors aren’t expecting sustained high inflation, says Alvarado, who maintains a neutral stance on TIPS. “They have a place in diversifying a fixed-income portfolio,” he notes, adding that he would be wary of unforeseen returns given the long-duration nature of TIPS indices, which makes them sensitive to interest rate changes.
For those eyeing long-term inflation protection, TIPS might be the way to go, Martin suggests. “Locking in an individual TIPS with a positive yield and holding it until maturity means you’re assured to outpace inflation by that yield,” he says. To illustrate, if you buy a 10-year TIPS with a 2% yield, you’re essentially guaranteed to beat inflation by 2% each year, regardless of inflation rates over the decade.
Investors concerned about persistent inflation should consider breakeven rates when deciding between TIPS and conventional Treasuries, Martin advises. For example, with a hypothetical yield of 4.5% on a 10-year Treasury and a 2% yield on a 10-year TIPS, the breakeven rate would sit at 2.5%. “This implies that inflation would need to average more than 2.5% over the next decade for TIPS to be a better choice than traditional Treasuries,” Martin explains.
