Inflation‐linked bonds were first issued by the United States Treasury Department in 1997. They are designed to provide investors with an asset that compensates them for inflation. The principal of those bonds is indexed to the consumer price index (CPI). Interest payments are also effectively indexed through the application of a fixed interest rate to the indexed or adjusted principal. Inflation‐linked bonds appeal to a variety of investors, including pension funds, many of which have to make payments tied to the rate of inflation. In addition, inflation‐linked bonds provide diversification for investors who hold other assets such as equities and conventional bonds.
Inflation‐linked bonds are popularly known as TIPS (Treasury inflation‐protected securities) in the United States. As of the end of 2015, public holdings of TIPS totaled $1.168 trillion. Gross issuance was $155 billion in 2015.1 In recent years, the Treasury Department has issued TIPS with maturities of 5, 10, and 30 years. In spite of the growth of the volume of TIPS outstanding, the market for inflation‐linked remains less liquid than for conventional Treasury bonds. Trading activity for TIPS tends to spike in conjunction with auction results and the release of data on the consumer price index.
The bonds are indexed to the non–seasonally adjusted consumer price index (NSA CPI). The non–seasonally adjusted index is used because it is not subject to revision. ...