"What are the Advantages of TIPS :: Treasury Inflation Protected Securities

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The most obvious advantage of TIPS, of course, is the protection of your spending power against inflation. This makes TIPS a much better investment for many investors than all other fixed income investments, for which inflation is a constant thief of spending power.

Another big advantage is that these Treasury Inflation Protection Securities are backed up by the full taxing power of the United States government. Therefore, they're for all practical purposes as risk free as all other Treasury bills and bonds.

The Interest and Increase in Principal Paid by TIPS is Not Taxable by Your State or Local Government

They are exempt from all but federal taxes.

If you would want to sell your TIPS, they are liquid. You could sell them. However, if you do so, you are subject to the market risk that they are not worth the principal. If interest rates have gone higher since you bought your TIPS bond, other investors will not pay full-price for your bond, since they can buy bonds that pay a higher rate of interest. The way to avoid this is just to hang onto your TIPS bonds until they reach maturity.

Because the index the Treasury uses for measuring the inflation rate is the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (CPI-U), published monthly by the Bureau of Labor Statistics (BLS), if you live in a rural area with a lower rate of inflation that cities, you may actually increase your spending power.

The big advantage of TIPS would be seen if we do have a period of high inflation, as some people predict we're entering.

Next: Who would benefit from buying TIPS

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