What is the primary purpose of Treasury Inflation-Protected Securities (TIPS)?

The primary purpose of Treasury Inflation-Protected Securities (TIPS) is to safeguard against inflation. TIPS are a form of U.S. government debt that is specifically designed to help investors preserve their purchasing power in the face of rising prices. The principal value of TIPS increases with inflation and decreases with deflation, ensuring that the interest payments are adjusted to reflect current inflation rates. This means that as inflation rises, the amount of interest paid to the investor also rises, making TIPS a suitable choice for those concerned about the erosive effects of inflation on their investment's value.

This dynamic makes TIPS particularly attractive during periods of inflation, as they provide a steady income while maintaining the real value of the original investment. The design and intent behind TIPS reflect a proactive approach to the potential purchasing power risk posed by inflation, distinguishing them from other types of fixed-income securities.