Why Inflation-Protected Bonds Aren’t Keeping Up With Inflation
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Here's your money briefing for Monday, October 10th. I'm J.R. Whelan for The Wall Street Journal. Inflation has taken a bigger and bigger bite out of your personal finances as it's raced out to levels not seen in 40 years.
What are Treasury Inflation-Protected Securities (TIPS) and how do they differ from regular Treasury bonds?
Many people who've added bonds to their portfolio or their 401k for diversification have invested in a type of government bond that turns inflation into a benefit.
So if inflation raises prices by 2% in a certain year, then the government will revise up how much it owes you by 2%. And that will be reflected in higher interest payments for you and also a higher principal or the full amount that you get back when the bond matures.
On today's show, our markets reporter Matt Grossman will join us to explain the nuts and bolts of Treasury Inflation Protected Securities, or TIPS. That's after the break.
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How do TIPS adjust principal and interest when inflation rises?
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There's a popular type of bond called TIPS that promises to pay out more to investors as inflation rises. But this year, those bonds' values haven't kept pace with inflation, and some investors have gotten a cruel surprise when checking their portfolio balances.
Can you see a concrete example of how TIPS payments change with inflation?
WSJ Markets reporter Matt Grossman has been looking into why, and he joins me now. Matt, thank you very much for being with us.
Thanks for having me.
So Matt, we're talking about treasury inflation-protected securities. Can you just refresh us as to what they are?
Sure. So treasury inflation-protected securities, also called TIPS, work pretty similar to run-of-the-mill normal treasury bonds. So TIPS are sold by the government, and they mature in either 5, 10, or 30 years. And just like regular treasury bonds, They pay interest twice a year at a fixed interest rate that gets locked in when you buy the bond. And the difference is that unlike a treasury bond, TIPS will actually help a bit to protect you against any inflation that happens while you own the bond. With a normal bond, there's any inflation between the time you buy it and the time it matures, that's going to eat into the interest and the returns that you get from owning the bond. TIPS have some features to try to protect you from the pain that the inflation could cause you.
Why do investors include TIPS in a diversified portfolio or 401(k)?
All right. So how do these TIPS bonds work? How do they protect people against inflation?
So when you buy a TIPS, you're basically lending the government money for five years or 10 years or however long the bond is outstanding. And the government's promising you that you'll get that money back when the bond matures. Now, the inflation process protection comes into play in that as inflation raises prices, the government will give you an upward adjustment to, in effect, how much money they owe you when the bond comes due. So if inflation raises prices by 2%, in a certain year, then the government will revise up how much it owes you by 2%. And that will be reflected in higher interest payments for you and also a higher principal or the full amount that you get back when the bond matures.
How are TIPS different from I‑bonds and why does that matter for investors?
Okay, so from the point where somebody would invest in a TIPS, can you give us an example using numbers?
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Chapters
8 chapters
1
What is the main topic discussed in this episode?
0:00–0:47
2
What are Treasury Inflation-Protected Securities (TIPS) and how do they differ from regular Treasury bonds?
0:47–1:29
3
How do TIPS adjust principal and interest when inflation rises?
1:29–2:17
4
Can you see a concrete example of how TIPS payments change with inflation?
2:17–3:24
5
Why do investors include TIPS in a diversified portfolio or 401(k)?
3:24–4:16
6
How are TIPS different from I‑bonds and why does that matter for investors?
4:16–5:34
7
Why have TIPS values fallen even as inflation surged in 2022?
5:34–7:30
8
What happens to TIPS if you sell them before maturity amid rising interest rates?
7:30–10:44
Speakers
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