What Is an Inflation-Linked Bond?

Treasury Inflation-Protected Securities (TIPS), also known as inflation-protected bonds, are bonds issued by the US Treasury and linked to the Consumer Price Index (CPI), which began in 1997.

Inflation-protected bonds

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Treasury Inflation-Protected Securities (TIPS), also known as inflation-protected bonds, are bonds issued by the US Treasury and linked to the Consumer Price Index (CPI), which began in 1997.

The basic characteristics of inflation-preserved bonds are a fixed coupon rate and a floating principal amount, of which the principal part will be adjusted according to the US Department of Labor's monthly non-seasonally adjusted city CPI index. While protecting the principal from inflation, its fixed coupon rate is usually lower than that of ordinary bonds over the same period.

As of August 2009, US TIPS bonds in circulation exceeded US $ 500 billion, accounting for approximately 11% of total US tradable government bonds.

Chinese name

Inflation-protected bonds

Foreign name

Treasury Inflation-Protected Securities

Alias

Inflation-preserved bonds

Short name

TIPS

The role of inflation-protected bonds

For investors, the role of inflation-protected bonds is as follows:

The first is to ensure the purchasing power of investor principal and interest in the future. According to the definition of inflation-preserving bonds, the principal of the bonds is adjusted according to the occurrence of national inflation, so the principal of investors will not depreciate with inflation. The U.S. Treasury makes interest payments on inflation-preserved bonds once every six months. Although the coupon rate remains the same, the interest rate is adjusted accordingly with the change in principal, thereby ensuring that investors can obtain actual returns and reducing the impact of inflation.

The second is to increase the diversity of the investment portfolio and reduce the risk of the investment portfolio. The emergence of inflation-preserved bonds has increased investor investment channels and enriched the diversity of investment portfolios. At the same time, the correlation between the total return of inflation-preserved bonds and the total return of investment products such as the S & P 500 index, gold, crude oil, and the Goldman Sachs Commodity Index is relatively low, which facilitates investors to diversify their investments, reduce portfolio risk, and increase total returns.

Third, the volatility of inflation-protected bonds is relatively low, and a lower deflation limit has been set. In the event of inflation, the principal of inflation-preserved bonds will be adjusted accordingly with inflation, and it will ensure that investors receive actual returns. Therefore, for investors, the risks of inflation-preserved bonds are low, and the volatility of returns is relatively low. In the event of deflation, although the investor s nominal return is reduced, the actual return is not reduced; and if deflation occurs when the bond matures, the US Treasury will compare the adjusted principal with the original principal amount, and Larger amounts are paid to investors.

For countries, the role of inflation-protected bonds is:

The first is to increase government financing channels and financing convenience. Inflation-preserving bonds are favored by investors because they can guarantee the future purchasing power of investments, thereby increasing the country's financing channels and convenience. The situation in the United States shows that inflation-protected bonds can become one of the main means of government financing.

The second is to enhance the ability of the central bank to open market operations. On the one hand, inflation-preserved bonds have enriched the variety of open market operations; on the other hand, the total value of inflation-preserved bonds has increased the space for the Fed's open-market operations.