Glossary · Bonds and rates
Inflation-protected bonds (TIPS)
Inflation-protected bonds raise their principal with consumer prices, so their interest and repayment keep their buying power. In the US they are called TIPS.
Also called: TIPS, Treasury Inflation-Protected Securities, inflation-linked bonds, index-linked bonds, linkers
Oct 2026. An ordinary 10-year Treasury: 5.13%.
The inflation rate at which both pay the same: 5.13% − 2.78%.
In plain words
An ordinary bond promises fixed dollars: $1,000 back in 10 years, whatever $1,000 buys by then. If inflation runs hot, you get your money back but it buys less. Inflation-protected bonds fix that: their principal grows with consumer prices.
The US Treasury has sold them since 1997 as TIPS, Treasury Inflation-Protected Securities. If prices rise 3% in a year, $1,000 of TIPS becomes $1,030 of principal, and its fixed interest rate is paid on the bigger amount. At maturity you get the inflation-adjusted principal back.
Their yield is a real interest rate: what you earn on top of inflation. A 10-year TIPS yielded 2.78% in Oct 2026, against 5.13% for an ordinary 10-year Treasury.
Example
A TIPS through three years of 3% inflation
Real TIPS pay interest every six months; whole years keep the arithmetic simple.
- You buy $1,000 of a TIPS with a 1% coupon.
- Year 1: prices rise 3%, so the principal becomes $1,030 and the interest is 1% × $1,030 = $10.30.
- Year 2: principal $1,060.90, interest $10.61. Year 3: principal $1,092.73, interest $10.93.
- At maturity you get $1,092.73: the buying power of your $1,000 three years earlier, plus 1% a year.
Since January 1997, when the first TIPS were sold, US consumer prices rose 112%: $1,000 of TIPS principal would have grown to about $2,121 by Oct 2026.
One level deeper
The principal follows the US consumer price index (CPI-U, not seasonally adjusted) with a lag of about three months. If prices fall, the principal shrinks, but at maturity you never get less than the original face value.
Comparing TIPS with ordinary Treasuries shows what investors expect inflation to be. The gap between the two 10-year yields, the breakeven inflation rate, was 2.35% in Oct 2026. If inflation averages more than that, TIPS will have done better; if less, ordinary Treasuries.
TIPS protect against inflation, not against rising real rates. In 2021 the 10-year TIPS yield was below zero, so buyers paid for protection; when real yields jumped in 2022, TIPS prices fell sharply. The lowest monthly 10-year TIPS yield since 2003 was −1.07%, in Aug 2021.
Ordinary vs inflation-protected 10-year Treasuries since 2003
Usually the ordinary 10-year yield is the upper line; the TIPS yield comes on top of inflation. The gap between them is the inflation rate investors expect: when it widens, they expect more.
The numbers behind the chart
| Date | 10-year TIPS (real yield) | Ordinary 10-year Treasury |
|---|---|---|
| Jan 2003 | 2.3% | 4.0% |
| Dec 2010 | 1.0% | 3.3% |
| Dec 2020 | −1.0% | 0.9% |
| Dec 2022 | 1.4% | 3.6% |
| Dec 2023 | 1.8% | 4.0% |
| Dec 2024 | 2.1% | 4.4% |
| Dec 2025 | 1.9% | 4.1% |
| Oct 2026 | 2.8% | 5.1% |
Why it matters
They are the only bonds that promise to keep your buying power: for savers worried about inflation, that is the point.
Their yield is the market’s real interest rate, a number central banks and economists watch closely.
The breakeven rate gives a live, market-based forecast of inflation.
A common mistake
Myth: TIPS can’t lose money.
In fact: Held to maturity, they return at least the original principal plus the inflation adjustments. Sold early, they can lose value when real yields rise, as in 2022. And if inflation turns out lower than the breakeven rate, ordinary Treasuries would have paid more.
Questions people ask
What is the difference between TIPS and I bonds?
Both protect against inflation, but I bonds are savings bonds: bought only from the Treasury, up to a yearly limit, never traded, and their value never falls. TIPS trade in the market, have no yearly limit, and their price moves every day.
Are TIPS taxed?
Yes. The interest and each year’s inflation increase in the principal are taxed by the federal government in the year they happen, even though you get the principal only at maturity. Like other Treasuries, they are free of state and local income tax.
What is breakeven inflation?
The ordinary Treasury yield minus the TIPS yield of the same maturity: the inflation rate at which both would pay the same. For 10 years it was 2.35% in Oct 2026.
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About the numbers
- The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
- US recessions (NBER business cycle dates): National Bureau of Economic Research (NBER), Business Cycle Dating Committee: US Business Cycle Expansions and Contractions.
- Consumer price index, all items (CPI-U), not seasonally adjusted: U.S. Bureau of Labor Statistics, Consumer Price Index, series CPIAUCNS; retrieved from FRED, Federal Reserve Bank of St. Louis.
- 10-year inflation-protected Treasury (TIPS) yield: Board of Governors of the Federal Reserve System, H.15 Selected Interest Rates, series FII10; retrieved from FRED, Federal Reserve Bank of St. Louis.
- US Treasury par yield curve rates: U.S. Department of the Treasury, Daily Treasury Par Yield Curve Rates (Interest Rate Statistics).
- S&P Composite (price, dividends, earnings, CAPE), US consumer prices and the 10-year Treasury rate: Robert J. Shiller, Online Data (shillerdata.com).
- The principal example uses the CPI-U not seasonally adjusted, without the three-month lag the Treasury applies.
- This page explains a term. It is not investment advice.