Long-term Treasurys are paying yields around 5%, giving investors an opportunity to lock in attractive income for decades.
But there’s still one major unknown: inflation.
A 5% return may look great today, but its buying power depends on how much prices rise over the years ahead. Treasury Inflation-Protected Securities, commonly called TIPS, offer a different approach. Instead of trying to predict inflation, investors can lock in a return designed to stay ahead of it.
Here’s how TIPS work, how to buy them, how they compare with regular Treasurys and I bonds, and why their current yields have caught investors’ attention.
What Are TIPS and How Do They Work?
Treasury Inflation-Protected Securities are U.S. government securities designed to protect investors from inflation.
TIPS are available in terms of five, 10 and 30 years. The easiest way to understand how they work is to think about them as having two elements:
A fixed interest rate. When a TIPS is issued, its interest rate (coupon rate) is set and does not change. Interest is paid every six months.
A principal value that adjusts with inflation. The amount you have invested rises or falls based on changes in the Consumer Price Index.
Those two pieces work together.
Suppose you buy $10,000 in TIPS with a 2% interest rate. Initially, 2% of $10,000 would equal $200 in interest per year, paid in two semiannual payments.
Now suppose inflation causes the principal to increase to $10,300. The interest rate is still 2%, but it is now applied to $10,300 instead of $10,000. That works out to $206 in annual interest.
As inflation continues to increase the principal, the dollar amount of your interest payments generally increases too.
That’s the key feature of TIPS: Inflation increases both the amount you ultimately get back and the dollar amount of interest you receive along the way.
If you hold an individual TIPS until maturity, you receive the inflation-adjusted principal or the security’s original face value, whichever is greater.
Here’s an illustration of how a hypothetical $10,000 TIPS investment with a fixed 2% coupon rate would have adjusted using actual annual inflation rates from 2016 through 2025.
How a $10,000 TIPS investment with a 2% coupon rate would have adjusted for inflation, 2016 to 2025
Year
Calendar year
Inflation rate
Starting principal
Inflation adjustment
Ending adjusted principal
Annual interest (2.0%)
Semi-annual payment (avg)
Year 1
2016
2.07%
$10,000.00
$207.00
$10,207.00
$204.14
~$102.07
Year 2
2017
2.11%
$10,207.00
$215.37
$10,422.37
$208.45
~$104.22
Year 3
2018
1.91%
$10,422.37
$199.07
$10,621.44
$212.43
~$106.21
Year 4
2019
2.29%
$10,621.44
$243.23
$10,864.67
$217.29
~$108.65
Year 5
2020
1.36%
$10,864.67
$147.76
$11,012.43
$220.25
~$110.12
Year 6
2021
7.04%
$11,012.43
$775.28
$11,787.71
$235.75
~$117.88
Year 7
2022
6.45%
$11,787.71
$760.31
$12,548.02
$250.96
~$125.48
Year 8
2023
3.35%
$12,548.02
$420.36
$12,968.38
$259.37
~$129.68
Year 9
2024
2.89%
$12,968.38
$374.78
$13,343.16
$266.86
~$133.43
Year 10
2025
2.74%
$13,343.16
$365.60
$13,708.76
$274.18
~$137.09
The coupon rate stays at 2%, but it is applied to a principal that grows with inflation, so the dollar amount of each interest payment rises along with prices. At maturity you receive the inflation-adjusted principal. Interest is paid twice a year, so each payment is roughly half the annual amount. Figures are illustrative and use annual inflation rates rather than the daily index ratio the Treasury applies.
One important point is that the inflation adjustments build on each other, just as inflation does. If a carton of eggs costs $4 and the price rises 3% annually for 10 years, it would cost about $5.38. If it then rises another 10%, that increase applies to $5.38 — not the original $4 price. TIPS work similarly: Each inflation adjustment is applied to the already-adjusted principal. Over time, the principal reflects the cumulative change in inflation, helping the investment maintain its purchasing power. You can see how inflation compounds over time using our inflation calculator.
How Do You Buy TIPS?
You can buy TIPS either directly from the U.S. government through TreasuryDirect or through a brokerage account.
TreasuryDirect allows you to buy newly issued TIPS at Treasury auctions. You can also buy newly issued TIPS through many brokerage firms.
A brokerage gives you another option: buying existing TIPS on the secondary market.
That’s where price becomes especially important. An existing TIPS may trade for more or less than its inflation-adjusted principal value depending on market conditions. If you pay a premium for a TIPS on the secondary market, the Treasury’s guarantee at maturity doesn’t protect that premium.
That’s also why you shouldn’t look only at a TIPS’ coupon rate when shopping. The yield to maturity — and, specifically for TIPS, the real yield — reflects the price you’re paying and provides a better picture of the return you could earn if you hold the security until maturity.
What’s the Difference Between TIPS and I Bonds?
If you’re a longtime Clark Howard listener, you may know that the money expert has held another inflation-protected investment, Series I Savings Bonds, commonly called I Bonds, since the 1990s. He has recently recommended I Bonds again.
While both TIPS and I bonds offer inflation protection and are backed by the federal government, they work very differently.
Think of I bonds as an inflation-protected savings tool for a small portion of your portfolio and TIPS as an inflation-protected investment that can be used within a larger bond portfolio.
Another important distinction is price stability. I bonds do not trade on the open market, so their value does not fluctuate based on investor demand or changing interest rates. TIPS are marketable securities, which means their price can rise or fall if you sell before maturity.
Why Are TIPS Particularly Interesting Right Now?
TIPS have offered inflation protection for decades. What makes them particularly interesting now is the amount investors can earn in addition to that protection.
As of Aug. 31, 2026, Treasury data showed approximate real yields of:
2.18% for five-year TIPS
2.44% for 10-year TIPS
2.99% for 30-year TIPS
Those rates change with market conditions. But they represent an opportunity to lock in a significant positive return above inflation — something investors couldn’t do when real yields were near or below zero.
For a simple example, consider a 10-year TIPS with a real yield of about 2.4%. The investment is designed to deliver a return of roughly 2.4% per year beyond inflation, before taxes, if held to maturity.
If inflation averaged 2%, the investment’s total nominal return would be roughly 4.4%.
If inflation averaged 4%, the nominal return would be roughly 6.4%.
The precise calculation is more complicated, but the central benefit remains the same: The investor doesn’t have to correctly predict inflation to maintain purchasing power.
If Regular Treasurys Yield Around 5%, Why Buy TIPS?
The key difference when comparing regular Treasurys and TIPS is nominal yield vs. real yield.
A regular Treasury’s yield is a nominal yield, which is the return before accounting for inflation. A TIPS’ real yield represents the return above inflation if held to maturity, with inflation protection coming through adjustments to the principal.
A regular Treasury may outperform TIPS if inflation turns out to be lower than investors expect. TIPS may outperform if inflation is higher than expected.
One way to compare the two is with the breakeven inflation rate. This is calculated by subtracting the real yield on a TIPS from the nominal yield on a regular Treasury with a similar maturity.
For example, on Aug. 31, 2026:
The 10-year Treasury yield was about 4.75%.
The 10-year TIPS real yield was about 2.44%.
The difference was approximately 2.31 percentage points.
That 2.31% difference is the approximate breakeven inflation rate.
If inflation averages more than roughly 2.3% over those 10 years, the TIPS would generally be expected to outperform the regular Treasury. If inflation averages less than that, the regular Treasury would generally be expected to do better.
The breakeven rate isn’t a perfect prediction of future inflation. But it provides a useful framework for comparing the two choices.
Your choice between long-term Treasury bonds and TIPS comes down to your personal outlook on inflation: Do you want to bet on a future of persistent low inflation or pay a small premium for built-in inflation insurance?
What Are the Risks and Tax Consequences of TIPS?
TIPS are backed by the federal government, but that doesn’t mean they are completely risk-free.
Their Market Value Can Fall
Like other marketable bonds, the price of a TIPS can rise or fall when interest rates change.
If real interest rates increase after you buy, the market value of your TIPS will generally decline. That may not matter if you hold an individual TIPS until maturity, but you could lose money if you need to sell early.
The longer the maturity, the more sensitive the price will generally be to changing interest rates.
Inflation Adjustments Can Create “Phantom Income”
TIPS can also create an unusual tax issue in a regular brokerage account.
The interest payments and any inflation-driven increases in principal are generally subject to federal income tax in the year they occur. That means you may owe taxes on an increase in principal even though you won’t receive that portion of the money until you sell the TIPS or it matures. TIPS interest and inflation adjustments are exempt from state and local income taxes.
This is sometimes called phantom income because you’re taxed on income you haven’t yet received in cash.
Holding TIPS in a tax-advantaged retirement account can avoid the need to pay taxes on those adjustments each year. However, the eventual tax treatment depends on the type of account. Withdrawals from a traditional IRA or 401(k), for example, are generally taxable, while qualified Roth withdrawals are tax-free.
Taxes shouldn’t automatically determine where you hold an investment, but they are an important consideration for where TIPS fit into your portfolio.
Final Thoughts
Locking in around 5% with a long-term Treasury sounds attractive. But what ultimately matters is how much purchasing power that money retains after inflation.
TIPS give investors another option: Instead of trying to guess what inflation will be, you can lock in a return above it.
That doesn’t make TIPS a replacement for stocks — or necessarily the right choice for your entire bond allocation. They are a tool designed for one particular job: protecting part of your portfolio from unexpected inflation.
For investors who want that protection and are comfortable with their nuance, today’s positive real yields make TIPS worth a closer look.
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