Treasury Inflation Protected Securities - TIPS

TIPS: Treasury. Inflation-protected. Securities. Tips. As in "show us your tips."

Why do we have such a thing? Well, the problem with super-duper safe bonds like those of the U.S. Government is that investors holding them a long time often do worse, after taxes, than inflation. Meaning that, if inflation is growing at 3% a year, and their bonds are only returning 1% a year after tax…then the investor is losing 2% a year in buying power.

In the 1990s, when investors started to realize this issue, they began to, um…well, stop buying U.S. Government bonds. And that’s a huge problem for a country that desperately needs to raise cash all the time.

So, rather than risk an illiquid marketplace where buyers weren’t buying government paper, Uncle Sam created TIPS, which basically adjusts the end-value the principal investors get based on the CPI, or consumer price index, which is a key measure of the average selling prices of a carton of milk…a gallon of fuel...a dozen eggs…and a grand slam breakfast at Denny's.

So yeah...TIPS. No hair gel and bleach necessary.