Treasury Inflation-Protected Securities (TIPS) is a type of Treasury securities that provides protection against inflation and real return .  I dont know if TIPS is the best bond to buy or not I dont think that is the right way to think anyway, e.g. it is better to have a good investment policy and asset allocation plan. But according to Larry Swedroe, academic literature strongly favors TIPS over other kinds of fixed income investment. Whatever the case may be, they are great adds to a well-diversified investment portfolio.

How Treasury Inflation-Protected Securities (TIPS) Work

To provide inflation protection, the principal of a TIPS increases with inflation (and decreases with deflation) as measured by the Consumer Price Index (CPI). Like other Treasuries, TIPS pay interest at a fixed rate twice a year.  The rate is applied to the adjusted principal, as such, the interest payments rise with inflation and fall with deflation.  At the maturity, you receive the adjusted principal or the original principal, whichever is greater protecting you against both inflation and deflation.

Lets take a look at an example where you purchased a $1,000 in TIPS at 4.25% interest rate and the CPI rose 3%.  First, the principal is adjusted for inflation, so your principal rises from $1,000 to $1,030, and increase of 3% as per the CPI.  Then the interest payment would be calculated from the new principal.  At the fixed interest rate of 4.25% and adjusted principal of $1,030, the amount of interest would be $43.78.

Key Benefits Of Treasury Inflation-Protected Securities (TIPS)

There are several advantages that make TIPS one of the best bonds to buy, these include:

• Inflation Protection Since TIPS adjust for inflation, they protect investors from the risks of unexpected inflation.
• Real Return Since interest rates are calculated after the principal is adjusted for inflation, investors are guaranteed a fixed rate of return regardless of inflation.
• Less Volatility TIPS are less volatile than traditional Treasury bonds with similar maturity.
• Good Diversifier Due to their low correlation to equities and other fixed-income investments, they reduce the overall volatility and risk of your portfolio.
• No Credit Risk The chance that the government will default on bonds is virtually none at least in theory .
• Tax Exemption Like other Treasuries, TIPS are exempt from state and local taxes.  However, interest payments and inflation adjustments that increase the principal are subject to federal tax in the year that they occur.
• Marketable TIPS can be bought and sold in the secondary securities market.  You do not have to hold TIPS to maturity.
• No Fee You can buy TIPS at no fee through TreasuryDirect .  However, there is a $45 fee if you wish to sell TIPS before the maturity date.

Where To Find The Latest Rates On Government Bonds

Here are a few sites where you can find the most recent interest rates for Treasury securities: