Features and Risks of Treasury Inflation Protection Securities

In 1997, the U.S. Treasury began the quarterly issuance of inflation indexed bonds, called Treasury Inflation Protection Securities (TIPS). So far, the Treasury has issued both 5-year and 10-year indexed bonds and will begin to issue 30-year indexed bonds and inflation indexed savings bonds in 1998. TIPS differ from conventional Treasury bonds in both their payment flows and risks. With virtually no inflation risk, they are the safest assets currently available in the U.S. market. Combined with conventional Treasury bonds, they allow investors to separate inflation risk from real interest rate risk and thus manage risk more efficiently.> To help investors understand and take full advantage of these new securities, Shen discusses the features and risks of the Treasury inflation indexed bonds. She explains why these bonds can benefit many investors and shows how the tax code prevents these bonds from being entirely inflation-risk free. Finally, she shows that historically the market risk of an indexed bond has been small compared to that of a conventional bond with similar maturity.