TIPS
U.S. Treasury bonds whose principal adjusts with CPI, so the investor is repaid in inflation-protected dollars and earns a real yield.
Formula
Adjusted Principal = Original Principal × (Current CPI / CPI at Issue)
TIPS (Treasury Inflation-Protected Securities) are U.S. government bonds whose principal is indexed to the Consumer Price Index (CPI-U). As inflation rises, the principal is marked up; the fixed coupon rate is then applied to that larger principal, so both the interest payments and the final repayment grow with inflation. At maturity the holder receives the greater of the inflation-adjusted principal or the original face value (a deflation floor).
Because the inflation component is handled by the principal adjustment, the coupon on a TIPS represents a real yield — the return above inflation. The quoted 10-year TIPS yield is the market's cleanest read on the real cost of capital, which directly drives the equity risk premium and the price of gold.
The practical edge: TIPS protect against unexpected inflation, not expected inflation — the expected portion is already priced into nominal bonds. The gap between a nominal Treasury yield and the matching TIPS yield is the breakeven inflation rate.
Example
You buy $1,000 of 10-year TIPS with a 2% coupon. Over the year CPI rises 3%, so principal adjusts to $1,030. Your coupon for that period is 2% of $1,030 = $20.60, versus $20 on un-adjusted principal. Both your income and your eventual repayment have kept pace with inflation.
Related Terms
Bond Yield
The return an investor earns by holding a bond — driven by its price, coupon, and time to maturity. Moves inversely with price.
BeginnerNominal Yield
A bond's stated yield without adjusting for inflation — the face-value return before accounting for the erosion of purchasing power.
IntermediateTreasury Security
Debt issued by the U.S. federal government through the Treasury Department — the benchmark risk-free asset in global finance.
Beginner