how to buy tips
as with other treasury securities investors can buy tips directly from the u s government at the treasury website treasurydirect gov this entails a somewhat complicated login process with several security layers 1you can also buy tips directly from your bank or broker this may be more convenient for those investors who already have a substantial portfolio of securities at a certain financial institution advantages and disadvantages of tipslet s discuss the advantages of treasury inflation protected securities the benefits include but aren t necessarily limited to along with those advantages there are some disadvantages to consider the principal increases with inflation meaning that at maturity bondholders are paid the inflation adjusted principalinvestors will never be paid less than their original principal when tips matureinterest payments increase as inflation increases since the rate is calculated based on the adjusted principal balancethe interest rate offered is usually lower than most fixed income bonds that do not have an inflation adjustmentinvestors might be subject to higher taxes on increased coupon paymentsif inflation does not materialize while tips are held then the utility of holding tips decreasesbest type of investor for tipstips are definitely best designed for certain types of investors some of those investors were briefly touched on when we talked about advantages and disadvantages more specifically we ll talk about those investors now and we ll start with conservative investors tips are ideal for conservative investors who prioritize capital preservation and seek to minimize risk since tips are backed by the u s government they are considered one of the safest investment options available for this reason institutional investors such as pension funds and insurance companies often use tips to match their long term liabilities with inflation protected assets to make sure they have future cash flow retirees and those focused on generating a stable income stream can benefit from tips as we touched on earlier the semi annual interest payments adjusted for inflation provide a reliable income that keeps pace with the rising cost of living in addition tips can be great for those who may be saving for retirement long term investors who are concerned about the impact of inflation over extended periods can leverage tips though this investment strategy may be best for those who are convinced there will be a high rate of inflation for years to come investors who are sensitive to state and local taxes might find tips advantageous as we talked about earlier there are some local and state tax benefits to owning tips other forms of niche investors may actually be esg investors if an investor does not align with corporate esg policies but instead politically aligns with the prevailing government entity legislation they can choose to invest in fixed income securities by entities i e the government in this example they align with regarding esg tips and nominal bondslet s quickly cover the difference between nominal bonds and tips nominal bonds and tips are both types of bonds issued by the u s treasury but they differ primarily in how they handle inflation protection nominal bonds also known as conventional bonds pay a fixed interest rate over the life of the bond and the principal value remains constant until maturity they do not provide explicit protection against inflation tips on the other hand are specifically designed to protect investors from inflation nominal bonds pay fixed interest payments based on the face value of the bond these coupon payments do not adjust for changes in inflation the market price of these nominal bonds fluctuates based on interest rates and overall market considerations the yield on nominal bonds is fixed interest income from both nominal bonds and tips is subject to federal income tax however the inflation adjustments to the principal of tips are also taxable as income in the year they occur this is not the case for nominal bonds example of tipsbelow is a comparison of the 10 year tips to the 10 year treasury note both issued and auctioned by the u s treasury department treasury notes t notes are intermediate term bonds maturing in two three five seven or 10 years they provide semiannual interest payments at fixed coupon rates 2as a historical example on march 29 2019 the 10 year tips was auctioned with an interest rate of 0 875 3 on the other hand fast forward about five years to see the impact that inflation has had according to tipswatch on march 21 2024 the first reopening auction for tips received a real yield to maturity of 1 932 4