TIPS, or Treasury Inflation-Protected Securities, are U.S. government securities designed to protect principal from changes in the Consumer Price Index.
The principal value of a TIPS bond is adjusted according to changes in the CPI. Because its interest payments are calculated from the adjusted principal, the dollar amount of those payments can change over time even though the stated coupon rate is fixed.
At maturity, investors receive the adjusted principal or the original principal, whichever is greater, under the Treasury’s standard protection. TIPS are issued in several maturities and can be bought directly through TreasuryDirect or traded in the secondary market.
TIPS are not identical to ordinary Treasury bonds. Their inflation adjustment can increase taxable income in a taxable account even when the investor has not received that adjustment in cash, a situation sometimes called phantom income.