Treasury inflation-adjusted bonds are backed by the full faith and credit of the US government. Because the principal is protected from inflation by being indexed with the CPI-U, the real purchasing power of your investment will keep up with rising prices. The market prices of these bonds can be affected only by changes to real, rather than nominal, interest rates. Real interest rates are those that are adjusted for inflation.
The second advantage to these bonds is that the principal of a bond at the time of purchase is guaranteed to an investor who holds the bond until maturity. An investor who buys a bond at a price equal to its inflation-adjusted par can expect its real yield to equal its coupon rate if it is not sold.
The safety of inflation-adjusted securities makes them an especially worthwhile investment for long-term investors who wish to live off the steady interest income and maintain the purchasing power of that income. Similarly, the investor is assured to receive back the principal with the same purchasing value it had when it was originally invested.
Issuing inflation-adjusted securities also benefits the Treasury department because it reduces its initial interest costs.
Taxation of Inflation-Adjusted Securities >>