notes or bonds paying a guaranteed rate of return notes or bonds paying a guaranteedabove inflation if held to maturity. Inflationindexed Treasury securities, available since 1997, are offered in the following maturities: five-year and 10-year Treasury notes, and 30- year Treasury bonds. Inflation-indexed Treasuries have two components: a fixed rate of return, paid out as interest, and an adjustable return (the principal) indexed to the rate of change in the consumer price index (CPI). If inflation rises, the interest coupon remains unchanged, but the inflation-adjusted principal (paid at maturity) increases in value. U.S. Treasury inflation-indexed securities are modeled after Real Return Bonds issued by the Government of Canada, and are available from the Treasury Department's Bureau of Public Debt in denominations as low as $1,000. Securities can be purchased electronically through Treasury Direct, the Treasury Department's sales window for small investors, or a financial broker-dealer.
bonds or notes that guarantee a return that beats inflation if held to maturity. Also applied to shares in mutual funds that hold such securities. Treasury Inflation-Protected Securities (TIPS) were introduced in 1997 in 10-year maturities and were subsequently issued as 5-year notes.
bonds or notes that guarantee a return that beats inflation if held to maturity. Also applied to shares in mutual funds that hold such securities. Inflation-indexed Treasury securities were introduced in 1997 in 10-year maturities and were subsequently issued as 5-year notes. Similar offerings followed by issuers such as the Tennessee Valley Authority and the Federal Home Loan Bank. In April, 1998, the first 30-year inflation-indexed Treasury bonds were issued. Inflation-indexed Treasuries offer a fixed rate of return, as well as a fluctuating rate of return that matches inflation. The fixed portion is paid out as interest, while the indexed portion is represented by an annual adjustment of principal. For example, a $1,000 inflation-indexed Treasury is issued at auction with a 3.5% interest rate and inflation that year turns out to be 3%. The 3.5% interest on $1,000 would be paid out and, at the end of the year, the inflation rate would adjust the principal, bringing it to $1,030. The following year, the fixed 3.5% interest rate would be applied to the new principal of $1,030 and the principal would again be adjusted according to that year's inflation rate. With low inflation prevailing in the late 90s, anti-inflation securities met a lackluster reception, although longer-term bonds were in somewhat greater demand. Chief drawbacks are the prospect of deflation, a lack of liquidity, and the fact that the inflation adjustment is taxable annually but not paid out until maturity.
