Inflation-Linked Bonds (TIPS)

A standard bond pays a fixed dollar amount at maturity. A TIPS works differently: the face value (the amount repaid at maturity) rises and falls with the Consumer Price Index (CPI) — the government's main measure of inflation. The coupon rate stays fixed, but because it is applied to an adjusting principal, the actual interest payment moves with inflation too. This makes TIPS a real-yield instrument — one designed to preserve purchasing power.

Suppose a TIPS is issued with a $1,000 face value and CPI rises 3% over a year (hypothetical example). The adjusted principal becomes $1,030, and the coupon is calculated on that higher base. At maturity, the holder receives the inflation-adjusted principal — or the original face value, whichever is greater, protecting against deflation.

TIPS are issued by the US Treasury, but many governments issue equivalent instruments under different names — UK index-linked gilts and Canadian Real Return Bonds work on the same logic. In all cases, the goal is to separate the real yield (the return above inflation) from the nominal yield (the stated rate on a conventional bond). Economists read TIPS yields as the market's best estimate of what money will actually buy after inflation is stripped out.

A frequent point of confusion: TIPS yields can be negative. That simply means buyers are willing to accept a return below inflation — often because they value the safety and inflation protection more than yield. See how inflation data feeds into these prices on the indicators page and in our guide to what moves commodity prices.