Treasury Inflation Protected Securities (known as TIPS), are inflation indexed bonds issued by the US Government. But what do they really offer you as an investor and how exactly do they work???
First of all, there's a lot of investor angst regarding future inflationary expectations. After all - it's a normal concern with the government deficit exploding to unfathomable proportions on a minute by minute basis (not to mention interest rates overall are at historically low levels, and when rates revert to the statistical mean inflation is a likely counterpart to that occurrence).
TIPS can be purchased direct from the US government through the treasury, a bank, broker or dealer - or most preferably through a low cost index fund such as DFA Inflation Protected Securities (DIPSX). video link Individual TIPS are purchased according to an auction process, where you can either accept whatever yield is determined at the auction or set a minimum yield you're willing to accept. In the auction method, if your requested yield target isn't met - your purchase request will not be executed.
TIPS come in 5, 10, and 30 year maturities and are bought in increments of $100. The return of principal AND ongoing interest payments depend on the TIPS principal value adjustment for the consumer price index (the CPI which is the most commonly used measure of inflation). The coupon payment however, is a constant and stays the same for the life of the security. This is where TIPS get a little tricky - while the coupon payment remains the same, the TIP itself fluctuates meaning the actual yield you receive will vary.
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