TIPS for Inflation-Proofing Your Portfolio: A Guide to Inflation-Indexed Securities

by Annette Thau

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In 1997, the U.S. Treasury introduced a new type of bond—Treasury Inflation-Indexed Securities, also known as Treasury Inflation- Protected Securities, or TIPS for short. As their name suggests, these bonds were intended to protect principal against inflation.

Initially, TIPS met with very little investor interest. But over the past two years, demand has grown and, as a result, a number of mutual fund groups introduced bond funds that are invested primarily in TIPS. In 2002 and 2003, TIPS funds were among the best-performing bond funds. Are these kinds of investments right for you?

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This article discusses TIPS and TIPS funds, as well as a separate, but related, inflation-indexed instrument: I Savings Bonds. The article will address a number of questions: How exactly do TIPS differ from other bonds? What are the factors behind the recent performance of TIPS? Will TIPS continue to outperform conventional bonds?

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