In these pages, we have talked about I-bonds, certificate of deposits, high-yield savings accounts. This is our first post on Treasury Inflation Protected Securities, commonly called TIPS.
Key points from treasurydirect.gov:
- We sell TIPS for a term of 5, 10, or 30 years.
- Unlike other Treasury securities, where the principal is fixed, the principal of a TIPS can go up or down over its term.
- The principal (called par value or face value) of a TIPS goes up with inflation and down with deflation.
- TIPS pay a fixed rate of interest every six months until they mature. Because we pay interest on the adjusted principal, the amount of interest payment also varies.
Unlike i-bonds, TIPS increase their principal based on inflation, up or down, and interest is paid on the changed principal amount. The maximum purchase is $10 million, compared to the $10,000 limit per person per year limit with i-bonds.
The key for TIPS is their real yield. Real yield is how much the security will give you after taking into account inflation.
Definition: The “real yield” of a TIPS is its yield above official future U.S. inflation, over the term of the TIPS. So a real yield of 1.55% means an investment in this TIPS will exceed U.S. inflation by 1.55% for 30 years.tipswatch.com
A link to US Treasury real yields for 5 yr TIPS has gone from highly negative to strongly positive over the past year.
A nominal interest rate equals the real interest rate plus a projected rate of inflation. A real interest rate reflects the true cost of funds to the borrower and the real yield to the lender or to an investor.investopedia.com
Most investments talk about nominal yield. It’s hard to get real yields for most investments.
To increase your wealth, look for investments with a positive real yield.
A mortgage with a low, fixed interest rate can increase your wealth in times of high inflation. The bank is losing money on your loan with negative real yields. They are subsidizing your loan compared to market rates.
TIPS are not sexy. They have some advantages compared to i-bonds. Like other Treasury products, you can buy them on treasurydirect.gov.
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