WHAT TO KNOW ABOUT INFLATION-PROTECTED BONDS

PRACTICAL PORTFOLIO

- JOHN WAGGONER

INFLATION is the monster in the closet for many investors, and that’s why Treasury inflation-protected securities (TIPS) are objects of great interest lately. The government-guaranteed bonds are designed to beat inflation year after year, so they provide a measure of portfolio protection against rising prices—but they are no panacea, and they take some figuring out.

Still, they may be worth a look, as the worry over rising prices is palpable these days. According to the University of Michigan’s April consumer confidence survey, Americans believed that inflation would average 6.5% over the next 12 months. That’s the highest reading since 1981, and it’s well more than twice the 2.4% rise in the consumer price index (CPI), the government’s main inflation gauge, over the previous 12 months.

The angst is understandable. The inflationary impact of the Trump administration’s tariff policy is uncertain, and the scars from the 9% inflation rate reached in June 2022 haven't faded. Inflation tends to be sticky—that is, prices that go up often don’t go down. Even though the rate of inflation has fallen since its peak, prices are still up a cumulative 24% since March 2020, according to the CPI. It’s no wonder funds that invest in TIPS have seen net inflows of $9.2 billion over the past 12 months, according to Morningstar, the Chicago mutual fund tracker. If you're worried about inflation, read on to see whether TIPS are right for your portfolio.

How TIPS work.