WSJ Your Money Briefing - What to Know About TIPS, the Inflation-Protected Securities

Episode Date: March 20, 2025

Treasury inflation-protected securities have reached their highest levels in two decades. WSJ reporter Imani Moise joins host Julia Carpenter to explain what that means for consumers. Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

Here's your money briefing for Thursday, March 20th. I'm Julia Carpenter for The Wall Street Journal. Inflation may have cooled last month, but it's higher than usual. And many investors remain concerned. Could a popular inflation hedge from a couple years ago, known as TIPS, be the answer? If you're looking to beat the market, maximize your returns, tips probably aren't the right products for you.

But if you want to make sure that your cash at least does not lose value with inflation, tips are a great choice. We'll talk with WSJ reporter Imani Moise about what you need to know before buying. That's after the break. Investors are tracking a lot of different things right now, confusion around tariffs, fears of a possible recession, and uncertainty about everything from interest rates to inflation.

As for that last one, some investors are looking to protect against inflation with tips or treasury inflation-protected securities. Wall Street Journal reporter Imani Moise joins me to talk about it. Okay Imani, to start let's zoom all the way out and try some basics. What are tips? Tips are a special kind of government bond that are designed to protect investors against inflation. So unlike other bonds the principle, so the money that you put in to the bond, moves up and down with CPI. So unlike other bonds, the principle, so the money that you put in to the bond, moves up and down with CPI. So that guarantees that no matter how much money you put in,

when it's time to take that money out, when the bond matures, your investment is going to at least have kept up with inflation. Imani, you and I have written about this stuff for a while now. We've been in this world for a while now. And we know that these investments have gone in and out of fashion over the years. I remember one time when they were really hot, another time when we didn't write about them for a while. So why is that and why are they coming back now?

They've definitely been in the headlines recently because the yields on tips have hit the highest in about two decades. Okay. Now the yields, they're not super crazy. Right now they're about 2%. But what happens is tips yields rises when inflation surprises to the upside. What we saw earlier this year is that a lot of investors thought that the inflation narrative

was over and the Fed was doing a good job of bringing it down to its target rate. But earlier this year, economists were surprised when inflation was higher than expected. And now people are expecting inflation to be elevated due to trade war concerns, potential deficits, things like that. What are the pros and what kind of investor does this benefit? It really benefits anyone who's looking to conserve capital or basically make sure that their money at least keeps up

with inflation so doesn't decline in value which tends to be most important for retirees because they're more concerned with capital preservation than maximizing their returns. Usually if you're not near retirement you're on the younger side you could afford to take on more risk you want to beat inflation as opposed to just keep up. And so we talked about the pros but I have to imagine tips also come with some risks. So now tell me about the cons. Well, when tips look most attractive to investors, they're usually about to decline in value.

So as I explained earlier, the market value of tips, so the yield on tips, typically go up when inflation surprises to the upside. And when inflation runs unexpectedly hot, that usually motivates the Fed to start cutting rates to cool down the economy. And when interest rates fall, the bond values fall, all bonds and tips included. So a lot of investors who poured into tips in 2021 when investors was running super hot were surprised

when as soon as the Fed stopped cutting, the market value of those investments fell steeply. Wow. So you're hedging. Yes. Another thing investors should be wary of is that they may have to pay federal tax on any unrealized gains on the principle of their tips. And because you don't actually get the value of whatever increase the principle is showing,

that means you're paying taxes on income that you haven't actually received yet. But you could avoid that either by purchasing tips funds instead of the underlying security, or making sure that you do buy tips in a tax advantage account like a Roth IRA. Your story, which listeners can find a link to in our show notes, also describes two tips strategies. First, investing in tips, mutual and exchange traded funds,

which spread an investor's money across multiple tips. And second, building what's called a bond ladder. Can you first tell me more about funds? How did they fit into a consumer's investment strategy? Buying tips funds is a good idea if you don't know when you're going to need access to that money, because they're just more liquid, you can pull money in and out, and you don't have

to pay taxes on any unrealized gains because the cost of those taxes are embedded in the fund fees. However, if you're buying through a fund because they don't have a maturity date, which will shield you from any actualized losses if the value of the bond goes down. That means when you pull it out, you may be faced with a reduction in principle, which you probably want to avoid as an investor. And what about the bond ladder strategy? The bond ladder strategy is a good strategy for anyone who wants to guarantee a certain

amount of income over a certain amount of time. So what a bond ladder is just buying bonds at different maturities so that you make sure that you get different payouts at set periods of time. So the downside there is that it's complicated, it's time consuming, you could outsource it to a financial advisor or broker if you work with one. You have to make sure that you put it in the right type of account to avoid any tax liabilities. So if someone is listening to this and decides, this all sounds great, let's add tips to the portfolio. How should they go about doing that? If you know for a fact that you plan to hold your tips

to maturity, you can buy them directly from the government at auction, Treasury Direct, which is the online platform where you could participate in treasury auctions. Or you can buy them through a brokerage account. Financial advisors recommend using a brokerage account most of the time, because if you ever want to sell, it's much easier to sell securities before maturity through a brokerage than through Treasury Direct. Because if they're in Treasury Direct, you have to apply to transfer those securities to a brokerage, which can take

months or sometimes up to a year. And then the last way, as we've covered, is a bond fund, which is the best option if you don't really know when you want to pull that cash. So the TLDR is this is cash preservation. Exactly. If you're looking to beat the market, maximize your returns, tips probably aren't the right products for you. But if you want to make sure that your cash at least does not lose value with inflation, tips are a great choice.

That's WSJ reporter Imani Moise. And that's it for your money briefing. This episode was produced by Ariana Asparu with supervising producer Melanie Roy and deputy editor Chris Sinsley. I'm Julia Carpenter for The Wall Street Journal. Thanks for watching!