Treasury inflation-protected securities TIPS

Treasury inflation-protected securities (TIPs) are one of the most innovative financial products to appear in recent years. They pay a real coupon, plus the return on the Consumer Price Index (CPI). Thus, they automatically protect investors 100% against rising inflation, a property no other security possesses. Further, in a rising inflation environment, returns on TIPs are negatively correlated with those of bonds and other assets whose prices tend to decline when inflation rises. 

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Treasury Inflation-Protected Security (TIPS) A security that is identical to a Treasury bond except that principal and coupon payments are adjusted to eliminate the effects of inflation. 

Index-linked or inflatiOTi-indexed bonds present additional issues in their analysis, due to the nature of their cash flows. Measuring the retimi on index-linked bonds is less straightforward than with conventional bonds, and in certain cases there are peculiar market structures that must be taken into accotmt as well. For example, in the United States market for index-linked treasuries (known as TIPS from Treasury Inflation-Indexed Securities) there is no significant lag between the inflation link and the cash flow payment date. In the United Kingdom, there is an 8-month lag between the inflation adjustment of the cash flow and the cash flow payment date itself, while in New Zealand there is a 3-month lag. The existence of a lag means that inflation protection is not available in the lag period, and that the return in this period is exposed to inflation risk it also must be taken into account when analysing the bond. 

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