What are TIPS bonds? How do TIPS Bonds work? If you have been thinking about investing in TIPS Bonds, then you will need to learn how inflation protected securities function. This article will explain how you can protect yourself from inflation and even profit.

It includes what you need to know about TIPS Bonds and where you can buy them. In a world of rising inflation and the surging cost of living protecting your purchasing power is key. This article contains the basics around what you need to know about Tips, Gilts and other inflation linked bonds. It includes:

  • What are Tips Bonds?

  • How TIPS Bonds Work?

  • Tips Bonds Rates.

  • How To Invest in Tips Bonds.

  • The Benefits Of Investing In Tips Bonds.

  • The Risks Of Investing In Tips Bonds.

Disclaimer: This is not financial advice and you are responsible for your own investing decisions. When investing capital is at risk. This article may contain affiliate links.

What Are Tips Bonds?

TIPS Bonds are Treasury Inflation-Protected Securities (T-I-P-S). They are a type of security issued by the U.S. Government. TIPS are bonds indexed to inflation. The TIPS purpose is to protect investors from the decline in purchasing power caused by inflation. As we know, inflation is currently a major issue in global economies including the US. It makes sense that many investors will be asking how TIPS bonds work right now.

How Do Tips Bonds Work?

The principal value of TIPS rises as inflation rises while the interest payment varies with the adjusted principal value of the bond. This functions differently from the standard bond, as technically the yield doesn’t increase it’s just the principle amount. The by-product is the % yield increases.

As inflation rises, the TIPS adjust in price to maintain their real value. This principle amount is actually protected,. Which means that investors will never receive less than the invested principle.

Say an investor buys $1,000 in TIPS with a couple rate of 1%. If the inflation level reaches 3% the principle amount will be adjusted to $1,030. Whilst the coupon rate remains the same (e.g. 1%), the interest payment on the principle would have grown. At the end of the year the investor will receive $10.30 up from $10.00.

In case you were wondering, at the time of writing, the US CPI Index Growth is at 8.25%.

US Consumer Prie Index YOY
US Consumer Price Index Year-On-Year

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U.S Treasury Inflation Protected (TIPS) Bonds Rates

TIPS are a popular asset to protect investment portfolios from inflation and profit from it tool. That’s because the principle amount increases with inflation. TIPs Bonds also pay interest every six months based on the fix rate of the bonds auction.

Inflation is measured by the Consumer Price Index, and if prices are rising then the interest rate will be multiplied out depending on the adjusted principle amount value. TIPS are issued with maturities of five, 10, and 30 years. At maturity, TIPs return the adjusted principal or the original principal, whichever is greater.

UK Government Issued Inflation Linked Bonds (GILTS)

The UK’s versions of TIPS bonds are GILTS. GILTS are the UK’s government issue bond that also adjusts it’s nominal coupon payment and final settlement repayment to meet accrued inflation. The result also being that investors are protected against the corrosive effects on inflation. GILTS are a good recent example of how inflation protected bonds values can fluctuate due to economic factors.

You may currently have read about the GILT crisis in UK. This is started with the announcement of Kwasi Kwarteng’s (Chancellor of the Exchequer) mini-budget. This caused a FIRE Sale of UK GILTS, which threatened to destabilise the UK and it’s pension industry. This forced the Bank Of England having to intervene with a £65bn GILT intervention.

The impact of this was two-fold the GILT Yield % surged, the by-product of this is that the UK’s long-term cost of borrowing also surged. This is because the lower the principle. of a GILT, the higher the yield.

Download my list of 10 Inflation-Linked Bond funds.

UK Government Inflation Linked Securities 30 Year Yield % via Financial Times
UK Government Inflation Linked Securities 30 Year Yield %

How To Invest in TIPS Bonds

There are a number of funds that focus specifically on government issued debt such as TIPS. These ETFs can be found on platforms such as Fidelity such as Fidelity Index UK Gilt Fund P GBP Acc Key Statistics. You can also use investment platforms such the Freetrade app. This is a commission free way to buy TIPS if you don’t want to make any major fund changes. You might even get a free share in a TIPS or GILTS ETF if you sign-up through my link. With this you get a free share worth up to £200 when you use my referral link.

Downloadthe 10 Inflation Linked Funds that make my shortlist. This include 10 funds I would personally use to invest in Global, U.S TIPS bonds or U.K. GILTS.

The Benefits Of Investing In Tips Bonds

The core benefits of investing in TIPS bonds:

  • The principal increases with inflation. This means that at maturity, bondholders are paid the inflation-adjusted principal.
  • Investors will never be paid less than their original principal when TIPS mature.
  • Interest payments increase as inflation increases since the rate is calculated based on the adjusted principal balance
  • Government issued debt is usually considered safe. As governments are unlikely to default on their debt. Especially in developed markets such as the UK and US.

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The Risks Of Investing In Tips Bonds

You can buy TIPS Bond or GILT and retain it until maturity and you’ll receive your coupon payment every 6-months. This may be 5 -years, 10-years or even 30-years. If you don’t want to retain the bond until maturity then you can sell it.

In this instance it’s critically important to understand the mechanics of TIPS bonds and their principle value. As when you sell it the price received is determined by the market at the time of sale, including capital gains/losses and the yield.

Why Are Inflation-Protected Bonds Falling When Inflation Is So High?

The prices of Treasury inflation-protected securities (i.e. TIPS, GILTS) are adjusted to keep up with inflation. The problem is that they’ve declined this year, even as inflation has soared. Inflation-protected bonds funds such as iShares $ TIPS UCITS ETF have fallen by 13.97% year-to-date. This has left many investors asking “why are my inflation-protected bonds falling when inflation is so high?”

According to John Fender Emeritus Professor of Macroeconomics, Birmingham Business School, A crucial point about gilts is that there is an inverse relationship between prevailing interest rates and the market price of gilts, so that if interest rates in the economy rise, gilt prices will fall and vice versa.

Whilst TIPS and GILTS offer inflation protection, they are inversely linked to interest rates. Interest rates are often increases to combat growing inflation. This is because as the interest higher interest rates reduce the discounted current value of practically all investments. That includes those with inflation-adjusted coupon payments in the future.

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ishares TIPS UCITS ETF USD (US Government Inflation Linked Bonds) YTD Performance From ishares website.
ishares TIPS UCITS ETF USD (US Government Inflation Linked Bonds) YTD Performance

Conclusion: What Are TIPS And Are They A Good Investment?

Treasury Inflation-Protected Securities (TIPS) are among the many types of debt securities offered by the U.S. Treasury. Unlike ordinary bonds, TIPS are designed to protect investors from inflation. That’s because TIPS principle value adjusts as the consumer prices rise. Tips funds offer:

  • Targeted exposure to inflation-linked bonds
  • Direct investment in inflation-linked government bonds
  • Single or multi-country government bond exposure with inflation protection

This means that they can be quite a good store of value. This allows the investor the maintain the purchasing power of your money. This can be especially valuable in times of high inflation. The investor is protected on the principle and interest payments, unless they sell the bond before it matures.

As we have seen prices of inflation-protected securities can fluctuate as wildly as other assets. Therefore, it’s important to consider your investment time-frame and goals.

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Where To Invest In TIPS, GILTS And Global Inflation-Linked Bond Funds

Inflation is a critical issue for all investors. Inflation linked bonds can protect investors and even help them profit against rising levels of inflation. You need to ask yourself, are you protecting yourself against the rising cost of living? Especially if you are approaching retirement.

Managing your asset allocation to accumulate and maintain wealth is key. Assets such as Treasury Inflation-Protected Securities (TIPS) can maintain your purchasing power. You can also earn an income from them. The problem is there are There are hundreds of bond funds out there. Don’t wasted hours trying to find them! I have personally collated a list of 10 inflation protected funds.

This means that you don’t have to spend your precious time hunting down the best inflation protected funds. Simply download by list of 10 Inflation-Linked Bond funds. This includes one of Fidelity’s select top 50 funds.

When Investing capital is at risk.

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What are TIPS Bonds: How To Profit Against Inflation
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What are TIPS Bonds: How To Profit Against Inflation
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What are TIPS bonds? How do TIPS Bonds work? If you have been thinking about investing in TIPS Bonds, then you will need to learn how inflation protected securities function
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