A Treasury Inflation-Protected Securities (TIPS) bond is a US government bond whose repayment amount rises with consumer prices. A TIPS issued on 15 July 2008 repaid $1,164.05 for every $1,000 of original principal, the amount lent, when it matured on 15 July 2018. The Consumer Price Index (CPI) measure the Treasury uses for the adjustment rose 16.4% between those dates.
This guide covers how the CPI adjusts a TIPS, the deflation floor, the yield gap to an ordinary Treasury and the US tax treatment.
What are TIPS? Treasury Inflation-Protected Securities (TIPS) are bonds issued by the US Treasury whose principal, the amount lent, is adjusted with the Consumer Price Index (CPI). The coupon, the interest payment, is a fixed rate applied to the adjusted principal.
The principal rises with inflation and falls with deflation, but at maturity the holder receives at least the original principal.
A TIPS quotes a real yield, its annual return after inflation. The gap between an ordinary Treasury yield and the TIPS yield is the breakeven inflation rate, the average inflation at which the two bonds pay about the same.
A TIPS held to maturity ends up ahead of an ordinary Treasury when inflation over its life exceeds the breakeven rate at purchase. It ends up behind when inflation falls short.
How does a TIPS differ from an ordinary Treasury?
An ordinary Treasury bond is a loan to the US government. It pays a fixed interest payment, called a coupon, twice a year. It returns a fixed principal on the maturity date. Inflation changes neither amount.
A TIPS keeps a fixed coupon rate but changes what the rate is applied to. The principal is adjusted with the CPI. The coupon payment is the fixed rate applied to the adjusted principal, so the payment moves as well.
The Treasury sells TIPS with terms of 5, 10 and 30 years. TreasuryDirect, its retail site, states that the rate is set at auction and is never less than 0.125%.
How does the Consumer Price Index adjust the principal and the coupon?
The adjustment is a ratio. The Treasury divides the reference CPI for today by the reference CPI on the day the bond began. The result is the index ratio. The adjusted principal is the original principal multiplied by the index ratio.
The reference CPI is the CPI from three months earlier. The Treasury's rules give the example that the reference CPI for 1 April is the CPI for January. The full measure is covered in what is the CPI.
An actual 10-year TIPS issued on 15 July 2008 shows the arithmetic. Its rate was 1.375%, so each half-yearly payment was 0.6875% of the adjusted principal.
The payment on 15 January 2009 was $6.85 per $1,000 of original principal, because the index ratio was 0.99564. The final payment on 15 July 2018 was $8.00, because the ratio was 1.16405.
What does the deflation floor protect?
Deflation is a fall in the general price level. The Treasury's rules say a TIPS is redeemed at maturity at its inflation-adjusted principal or its par amount, whichever is greater. The par amount is the stated value at original issuance, so the holder never receives less than the original principal.
Source: TreasuryDirect index ratios for CUSIP 912828JE1; YX Insights
The chart follows the 2008 TIPS from issue to maturity. The ratio rose to 1.02005 on 1 October 2008, when the reference CPI was July's. It then fell because the CPI dropped from 216.573 in October 2008 to 210.228 in December 2008. The three-month lag delayed the effect.
On 1 March 2009 the reference CPI was the December figure, so the ratio was 0.97490. The principal was $974.90 per $1,000. The ratio was last below 1 on 19 October 2009. It reached 1.16405 at maturity, so the floor never paid out.
The floor has two limits. It applies at maturity only, so a holder who sells earlier receives the market price. It also covers the original principal, not a price above it that a buyer paid in the market.
What are the real yield and the nominal yield?
A yield is the annual return from buying a bond at its current price and holding it to maturity. An ordinary Treasury quotes a nominal yield, because inflation is not removed. A TIPS quotes a real yield, a return on top of inflation. The idea is covered in what is a real interest rate.
The coupon rate is fixed at auction, but the yield changes with the price, as explained in bond prices and yields. The chart below uses an estimate of the 10-year yield for each day.
Source: FRED series DGS10 and DFII10; YX Insights
On 2 January 2003, the first day of the TIPS series, the ordinary 10-year yield was 4.07% and the TIPS yield was 2.43%. Through 30 September 2026 the real yield ranged from 3.15% on 21 November 2008 to −1.19% on 3 August 2021.
A negative real yield means the buyer accepts a return below inflation.
What is the gap between the two yields?
The gap is the nominal yield minus the real yield. On 2 January 2003 it was 4.07% minus 2.43%, or 1.64%. The gap is the breakeven inflation rate, covered in what is breakeven inflation.
If CPI inflation averages the breakeven rate over the life of the bond, the TIPS and the ordinary Treasury pay about the same. Through 30 September 2026 the 10-year gap ranged from 0.04% on 20 November 2008 to 3.02% on 21 April 2022.
When does a TIPS holder do better or worse than an ordinary Treasury holder?
A TIPS held to maturity does better than an ordinary Treasury of the same term when inflation over its life exceeds the breakeven rate at purchase. It does worse when inflation falls short. The chart below tests this on past data.
Source: FRED series T10YIE and CPIAUCNS; YX Insights
The orange line is the monthly 10-year breakeven rate. Its low is December 2008, at 0.25% as a monthly average. The blue line is the yearly CPI inflation over the ten years that followed each start month, plotted at the start month.
The blue line stops at September 2016, because ten years after that start is September 2026, the latest CPI month used. October 2015 is missing because the CPI for October 2025 was never published.
Across the 164 start months, inflation beat the breakeven rate in 84 and fell short in 80. The mean breakeven rate was 2.11% and the mean inflation outcome was 2.22%. In single months, inflation came in as much as 1.07 percentage points under the breakeven rate and as much as 1.95 over it.
The largest shortfall started in July 2008, when the next ten years averaged 1.37% a year. The largest excess started in February 2016, when the breakeven rate averaged 1.31% and inflation averaged 3.26% a year.
The test is approximate. The windows overlap. The yields are estimates for a 10-year term, not one bond. Taxes are ignored.
An early sale carries a separate risk, because the price of a TIPS falls when its real yield rises.
How is the inflation adjustment taxed in the United States?
This section is general information, not tax advice. The rule was read on 14 October 2026 in Internal Revenue Service (IRS) Publication 550 (2025), Investment Income and Expenses.
The IRS states that a holder must report as original issue discount (OID) any increase in the inflation-adjusted principal that occurs during the year the holder owned the bond. The payer reports it on Form 1099-OID.
The tax is therefore due in the year the increase accrues, although the cash arrives at maturity or on a sale. For example, if the principal rose from $1,000 to $1,030 in a year, the $30 increase is reported for that year. TreasuryDirect adds that a TIPS is subject to federal tax and not to state or local tax.
A TIPS held to maturity locks in the real yield paid at purchase. The CPI sets the rest. The gap to the ordinary Treasury yield is the inflation rate at which the two pay about the same.
Common questions about TIPS bonds
Do TIPS lose money if there is deflation?
TIPS can lose principal during deflation, but at maturity the holder receives at least the original principal. The adjusted principal falls when the CPI falls, which also lowers the interest payments. The floor covers the original principal only. It does not cover a price above that paid in the market.
What is the difference between a TIPS and an ordinary Treasury bond?
An ordinary Treasury pays a fixed coupon on a fixed principal. A TIPS pays a fixed coupon rate on a principal that is adjusted with the CPI. The ordinary bond quotes a nominal yield and the TIPS quotes a real yield. The gap between the two is the breakeven inflation rate.
Is the inflation adjustment on TIPS taxable?
Yes, in the United States the increase in principal is taxed as original issue discount in the year it accrues, even though the cash arrives later. The IRS describes this in Publication 550, read on 14 October 2026. This is general information, not tax advice.
When do TIPS beat ordinary Treasuries?
A TIPS held to maturity beats an ordinary Treasury of the same term when inflation over the period exceeds the breakeven rate at purchase. It falls behind when inflation is lower. In the 164 start months tested here, inflation beat the breakeven rate in 84 and fell short in 80.
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