Why everyone suddenly cares about inflation‑protected securities
If you started thinking about inflation only after 2021–2023, you’re not alone.
For more than a decade after the 2008 crisis, inflation in the US, Europe and many developed countries was boringly low — usually under 2% a year. Then came COVID, supply shocks, massive stimulus, wars, energy prices… and by 2022 US inflation peaked above 9%, the highest in 40 years.
People who thought “bonds are safe” suddenly watched their purchasing power erode in real time. That’s when interest in inflation‑protected securities exploded. Searches like “best inflation protected securities to invest in” and “are inflation protected bonds a good investment now” started spiking — and for good reason.
This guide will walk you through what these instruments are, how they work, and how to decide whether they deserve a place in your portfolio in 2025 and beyond.
We’ll keep the tone conversational, but we’ll also get into the technical mechanics in separate blocks so you can go as deep as you want.
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What exactly are inflation‑protected securities?
At the core, an inflation‑protected security is just a bond with a twist:
– A normal bond pays you a fixed coupon on a fixed principal.
– An inflation‑protected bond adjusts either:
– the principal,
– or the interest,
based on inflation.
So instead of promising you “$1,000 in 10 years plus 2% interest,” it tries to promise “the *purchasing power* of $1,000 in 10 years plus some interest.”
In practice, the most famous example is TIPS: Treasury Inflation‑Protected Securities issued by the US government.
Other countries have their own versions:
– UK: Index‑linked gilts
– Euro area: OATi/OAT€i (France), BTP Italia (Italy), etc.
– Canada: Real Return Bonds (RRBs)
But in 2025, for a beginner investor using mainstream brokers, you’ll most often deal with US TIPS directly, or via TIPS funds best inflation protected bond funds on the market.
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A quick historical detour: why TIPS exist at all
TIPS are relatively young.
– They were first issued in the US in 1997.
– The idea: give investors a way to lend to the government without worrying about inflation eating their returns.
In the 1970s and early 1980s, inflation in the US repeatedly hit double digits. People who had bought long‑term fixed‑rate bonds earlier watched real returns go deeply negative. That trauma stayed in the collective memory of central bankers and bond markets.
By the 1990s, several countries had started issuing inflation‑linked bonds. The US joined with TIPS, hoping to:
1. Attract long‑term investors (pensions, insurers) who care about real returns.
2. Get a market‑based measure of inflation expectations (the famous “breakeven inflation rate” — more on that in a moment).
For almost 20 years, TIPS were niche. Then 2021–2023 happened.
In 2020, 10‑year breakeven inflation (the market’s implied inflation forecast from TIPS vs normal Treasuries) was around 1.5–1.7%.
By 2022, it climbed above 3% at points.
That’s when demand for inflation‑protected ETFs, mutual funds, and direct TIPS ownership really took off.
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How TIPS actually work (without the jargon)
Let’s simplify with an example.
Say you buy a 10‑year TIPS with:
– Face (original) principal: $1,000
– “Real” interest rate (coupon): 1% per year
– Interest paid twice a year (like most bonds)
Here’s the key: the principal is adjusted by CPI (inflation).
If inflation is:
– 3% in year 1
– 4% in year 2
– 2% in year 3
Then after 3 years, your principal doesn’t stay $1,000. It’s something like:
> New principal ≈ $1,000 × 1.03 × 1.04 × 1.02 ≈ $1,095
Your coupon is 1% of this *adjusted* principal. So as inflation increases the principal, your coupon payments rise in dollar terms.
At maturity, you get the inflation‑adjusted principal, or the original $1,000 — whichever is higher. That gives some protection if there’s deflation.
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> Technical detail: the inflation indexation
>
> – TIPS are indexed to the CPI‑U (Consumer Price Index for All Urban Consumers) with a roughly two‑month lag.
> – Each TIPS has an Index Ratio = (Reference CPI at payment date) ÷ (Reference CPI at issuance).
> – Adjusted Principal = Original Principal × Index Ratio.
> – If cumulative inflation is 25% over the life of the bond, the principal becomes $1,000 × 1.25 = $1,250.
> – If cumulative inflation is negative (deflation), principal can go down in between, but at final maturity you are guaranteed at least your original principal.
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Real return vs nominal return: the key idea
Inflation‑protected securities focus on real returns — that is, return *after* inflation.
A simple way to think about it:
– A normal Treasury might yield 4.5% (nominal yield).
– A 10‑year TIPS might yield 1.9% (real yield).
The market is implicitly saying:
> Expected inflation ≈ 4.5% − 1.9% = 2.6% per year
That difference is the breakeven inflation rate. If actual inflation over time is higher than 2.6%, TIPS likely end up the better deal. If it’s lower, nominal Treasuries win.
So, when people ask “are inflation protected bonds a good investment now?”, what they’re *really* asking is:
> Do I think future inflation will be higher or lower than what the market currently expects?
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Three main ways to invest in inflation‑protected securities
You don’t have to be a bond trader to use these. In 2025, individuals usually choose one of three paths:
1. Buy TIPS directly from the US Treasury or via a broker
2. Buy a mutual fund that invests in TIPS
3. Buy an ETF focused on inflation‑protected bonds
Let’s go through each, with practicality in mind.
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Option 1: Buying individual TIPS directly
If you like simplicity and can hold to maturity, owning individual TIPS can be very straightforward.
You can buy them:
– On TreasuryDirect.gov (no fees, but clunky interface), or
– Through most brokers (Fidelity, Vanguard, Schwab, Interactive Brokers, etc.)
Here’s how to buy inflation protected securities online in the simplest possible way:
– Open a brokerage account or a TreasuryDirect account.
– Search for “Treasury Inflation‑Protected Securities” or “TIPS.”
– Choose:
– Maturity (5, 10, 30 years are common)
– Quantity (usually sold in $100 or $1,000 increments)
– Place an order during the auction or buy existing TIPS on the secondary market.
Advantages:
– You lock in a known real yield if held to maturity.
– No management fees.
– Very strong credit quality (US government backed).
Disadvantages:
– You get price volatility if you look at the value before maturity.
– Building a ladder (multiple maturities) requires a bit of work.
– Tax treatment of the inflation adjustment can be annoying (taxable annually in a taxable account, even though you don’t receive the principal until maturity).
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> Technical note: tax wrinkle (US context)
>
> – The inflation adjustment to TIPS principal is taxable income each year, even if you don’t receive it in cash yet.
> – That’s why many investors prefer holding TIPS in tax‑advantaged accounts (IRAs, 401(k)s, etc.).
> – Coupon interest is also taxed as ordinary income.
> – Rules differ outside the US; always check local tax laws.
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Option 2: TIPS mutual funds and “best inflation protected bond funds”
Some investors don’t want to pick specific maturities or think about auctions. That’s where mutual funds and pooled strategies come in.
A typical TIPS mutual fund:
– Holds a diversified portfolio of TIPS across maturities.
– Automatically reinvests coupons and maturing bonds.
– Charges an annual expense ratio (for example, 0.10%–0.40%).
Benefits:
– Set‑and‑forget exposure to inflation‑linked bonds.
– Professional management of duration and liquidity.
– Easy to hold in retirement accounts.
Drawbacks:
– No fixed maturity — the fund is perpetual, so the price can fall even if you hold it for years.
– You don’t “lock in” a specific real yield the way you do with individual TIPS.
– Higher fees than some ETFs in many cases.
When people search for TIPS funds best inflation protected bond funds, they’re usually looking for:
– Low expense ratio
– Reasonable average duration
– Good tracking of the TIPS market index
Even a 0.20% fee matters if real yields are only 1–2%; that’s 10–20% of your real return being eaten by costs.
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Option 3: Inflation‑protected ETFs (the “easy button” for many)
In the last decade, ETFs have become the dominant vehicle for TIPS exposure.
Think of them as the “index fund” version of inflation‑protected securities:
– You buy them like a stock on an exchange.
– They usually track a broad TIPS index.
– Fees tend to be very low — some under 0.05% annually in 2025.
When doing an inflation protected ETFs comparison fees returns, you typically want to examine:
– Expense ratio (0.04% vs 0.20% adds up over decades).
– Average duration (is it short‑term TIPS or all maturities?).
– Tracking error vs its stated index.
– Historical volatility and how it behaved in inflation spikes or rate hikes.
Advantages:
– Very low cost; diversified.
– Intra‑day trading if you care about that.
– Easy to combine with other ETFs in a portfolio.
Disadvantages:
– Same tax issues as TIPS mutual funds in taxable accounts.
– No fixed “end date,” so you’re always exposed to interest‑rate risk.
– Market price can deviate slightly from net asset value (usually small for large ETFs).
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What inflation‑protected securities actually protect you from (and what they don’t)
These instruments do one job very well: they protect you against unexpected inflation, in your bond portion.
They *don’t* guarantee:
– That your total portfolio won’t fall.
– That you’ll beat stocks.
– That your real yield will be high.
In fact, in 2013 (“taper tantrum”), 2018, and 2022, TIPS funds had noticeable negative returns in some months and even years, because real yields rose quickly. Rising yields = falling bond prices, even for inflation‑protected bonds.
Concrete example:
– Suppose on January 1, Real 10‑year yield = 0%.
– By December 31, Real 10‑year yield = 2%.
– Over that year, inflation = 3%.
Even though inflation was 3%, the price of your long‑duration TIPS fund can still drop because new buyers now demand 2% real yield instead of 0%. The inflation linkage helps, but it doesn’t immunize you from interest‑rate risk.
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Real‑world example from 2021–2023
Let’s reconstruct what happened to a typical US investor using a broad TIPS ETF:
– In 2021:
– Inflation surged from ~1.4% in January to over 7% by December (year‑over‑year).
– TIPS funds did well relative to normal Treasuries, because the inflation adjustment helped.
– In 2022:
– Inflation stayed high, peaking above 9%.
– The Federal Reserve aggressively hiked rates from near 0% to over 4%.
– Real yields rose sharply, and many TIPS ETFs still posted negative total returns for the year despite high inflation, though they generally *outperformed* equivalent nominal Treasuries.
Moral: inflation‑protected securities are not a magic shield. They limit the damage from inflation compared with fixed nominal bonds, but they still trade in the bond market with all its ups and downs.
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When might inflation‑protected bonds make sense in 2025?
As of 2025, several things are true in many developed markets:
– Central banks talk about “bringing inflation back to 2%,” but inflation has been sticky, often in the 3–4% range.
– Real yields on 10‑year TIPS have climbed from deeply negative territory (e.g., around −1% in 2021) to positive values (e.g., around 1.5–2.0% in 2024–2025 ranges, depending on the day).
– Older retirees and conservative investors have become more sensitive to erosion of purchasing power after the 2020s shocks.
So are inflation protected bonds a good investment now?
They can be, under at least three conditions:
– You hold them as part of the bond side of a diversified portfolio, not as a stand‑alone bet.
– You’re specifically worried that *inflation will average higher* than what the market expects over the next 5–30 years.
– You’re okay with short‑term price volatility in exchange for long‑term real purchasing power stability.
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Who typically uses inflation‑protected securities
You’ll often see TIPS and similar assets used by:
– Retirees and near‑retirees who want their spending power protected.
– Long‑term planners (pension funds, endowments) matching future real liabilities.
– Cautious investors who remember the 1970s (or have read enough history to respect it).
Common practical uses:
– Replacing part of nominal bond holdings with TIPS (e.g., 50% nominal, 50% TIPS).
– Building a ladder of individual TIPS maturing around expected retirement years.
– Parking some “safe” money in short‑term TIPS ETFs instead of cash when inflation risk feels high.
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How much of your portfolio could go into inflation‑protected securities?
There’s no universal formula, but some typical ranges used by planners:
– For young, growth‑oriented investors:
– 0–20% of the bond allocation in TIPS or inflation‑protected ETFs.
– For mid‑career investors:
– 20–50% of the bond side, depending on inflation worries and risk tolerance.
– For retirees relying heavily on bond income:
– Sometimes 50–100% of bonds in TIPS and similar instruments, especially if their spending is sensitive to price levels.
Key idea: you still want equities and other assets for long‑term growth. Inflation‑protected bonds help you protect the “defensive” part of the portfolio, not replace growth assets entirely.
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Concrete steps to get started (beginner roadmap)
If you’re new and want a simple, practical path:
– Step 1: Decide on your bond vs stock mix.
Example: 70% stocks / 30% bonds for a long‑term investor.
– Step 2: Decide what fraction of bonds to inflation‑protect.
Example: Of that 30% in bonds, you want half in TIPS — so 15% of your portfolio.
– Step 3: Pick your vehicle:
– If you prefer minimal maintenance:
– Choose a low‑cost TIPS ETF or mutual fund.
– If you like predictability and can handle some complexity:
– Consider buying a ladder of individual TIPS maturing in your key spending years.
– Step 4: Fund it gradually.
Instead of going all in at once, you could spread purchases over 6–12 months to reduce timing risk.
– Step 5: Review once a year.
Check:
– Has your allocation drifted?
– Has your time horizon or risk tolerance changed?
– Are fees still competitive compared to newer funds/ETFs?
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Common beginner mistakes and how to avoid them
Three pitfalls show up again and again:
– Mistake 1: Expecting TIPS to always go up when inflation is high
Reality: If real yields rise faster than inflation adjustments, TIPS prices can fall.
– Mistake 2: Ignoring fees
With real yields of 1–2%, paying a 0.50% expense ratio is giving up a big chunk of your real return. When researching “best inflation protected securities to invest in,” scrutinize expense ratios carefully.
– Mistake 3: Using TIPS as a short‑term inflation hedge
Over very short periods (months), TIPS prices can be driven more by interest‑rate moves and market sentiment than by inflation adjustments. Think in years, not weeks.
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Bringing it all together
Inflation‑protected securities are not a fashionable new product. They emerged from decades of painful lessons about how quickly inflation can devastate “safe” assets.
From their US launch in 1997, through the low‑inflation complacency of the 2010s, to the jolting wake‑up of 2021–2023, TIPS and their cousins have steadily evolved from niche tools for specialists into mainstream building blocks for thoughtful investors.
In 2025, understanding them is no longer optional if you take long‑term planning seriously:
– They give you a clear way to separate real and nominal returns.
– They allow you to anchor part of your portfolio in inflation‑linked cash flows.
– Through individual bonds, mutual funds, and ETFs, they’re accessible to almost anyone with an online brokerage account.
If you remember just three things:
– They protect purchasing power, not market price.
– Their value depends heavily on the gap between actual inflation and expected inflation.
– Costs, duration, and tax treatment matter as much as the label “inflation‑protected.”
Then you’re already ahead of most beginners.
From here, your next step could be as simple as:
– Looking up a low‑cost TIPS ETF in your brokerage account,
– Reading its fact sheet (expense ratio, duration, holdings),
– And allocating a small, intentional slice of your bond portfolio to it.
Over time, that quiet decision may matter far more to your future purchasing power than any short‑term market headline.