Inflation-Protected Treasuries

(MoneyWatch) 

How can I make sure my bond portfolio won't lose ground to inflation?

Try TIPS, short for Treasury inflation-protected securities.

TIPS are Treasury bonds with a twist: Their principal value is adjusted every six months based on changes in the consumer price index (CPI). So if inflation as measured by the CPI were to climb, your TIPS' principal value would climb as well — meaning you'd receive larger interest payments as well as a larger principal repayment when you cashed your bond in. (TIPS' principal values can decline in the event of deflation, but you'll always receive at least your original principal amount at maturity.)

TIPS typically offer relatively low yields compared to ordinary Treasury securities. But fears about deflation recently have caused many investors to avoid inflation-adjusted bonds, causing the gap between TIPS' yields and Treasury yields to shrink — possibly making this a good time to buy these ultra-safe securities.

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