2025 Inflation-Indexed Securities: Prices, Benefits & Real Returns Explained

Adam Hayes, Ph.D., CFA, brings over 15 years of Wall Street experience as a derivatives trader and financial author. With advanced degrees in economics and sociology, he specializes in economic sociology and behavioral finance. Adam currently teaches at the Hebrew University in Jerusalem, blending academic insight with practical market knowledge.

What Are Inflation-Indexed Securities in 2024?

Inflation-indexed securities are financial instruments designed to deliver returns that outpace inflation when held to maturity. These securities adjust their principal or interest payments based on inflation metrics, such as the Consumer Price Index (CPI), ensuring investors maintain purchasing power over time. Popular examples include Treasury Inflation-Protected Securities (TIPS) issued by the U.S. government.

Also known as inflation-linked or real return securities, they offer a reliable way to safeguard investments against inflationary pressures.

Key Points to Remember

• Guarantee returns exceeding inflation, typically tied to CPI or similar indices.
• Protect investor returns from inflation’s diminishing effects, ensuring real gains.
• Offer generally lower coupon rates compared to higher-risk bonds due to their safety.
• Provide limited protection during deflationary periods.

How Inflation-Indexed Securities Function

These securities adjust their principal value daily according to inflation indices like the CPI, which tracks price changes in a basket of goods and services and is published monthly by the Bureau of Labor Statistics. This adjustment ensures that both principal and interest payments keep pace with inflation.

For example, a bond yielding 3% when inflation is 2% effectively earns only 1% in real terms, which may not suffice for investors relying on fixed incomes. Inflation-indexed securities mitigate this risk by boosting returns in line with inflation.

Market Insight

The market for these securities tends to be less liquid, as most investors adopt a buy-and-hold strategy.

Advantages of Investing in Inflation-Indexed Securities

Unlike conventional fixed-income instruments that lose value during inflationary periods, inflation-indexed securities guarantee a positive real return. Typically issued as bonds or notes, they provide a secure investment option with coupon payments that adjust based on inflation changes. While their coupons are lower than riskier bonds, they offer peace of mind against inflation erosion.

These securities are widely used globally: the UK issues inflation-linked gilts tied to the Retail Price Index (RPI), Canada offers real return bonds, and India issues inflation-indexed bonds via the Reserve Bank of India.

Historical Note

Inflation-linked bonds date back to the American Revolution, created to protect the real value of goods amid wartime inflation.

Example: Understanding a 2024 Inflation-Indexed Security

Consider a $1,000 Treasury Inflation-Protected Security (TIPS) with a 2.5% annual coupon, paid semi-annually, and a 5-year maturity. If inflation is 3% compounded semi-annually, the principal adjusts to $1,015 after six months, making the interest payment $12.69 instead of $12.50 without inflation adjustment.

At maturity, the inflation-adjusted principal would grow to approximately $1,160.54, with the final coupon payment reflecting this increase. This mechanism ensures that while the nominal coupon rate remains fixed, the actual payments rise with inflation, preserving investor purchasing power.

Series I Savings Bonds operate similarly but adjust interest rates daily based on inflation, never falling below 0% even during deflation.

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