InvestinginTreasuryInflationProtectedSecurities.pdfVIP

Investing in Treasury Inflation Protected Securities Vanguard Investment Counseling Research Executive Summary Inflation-protected securities are bonds with unique investment characteristics. These securities represent a relatively new type of financial asset in the United States, where the government first issued Treasury Inflation-Indexed Securities (also called Treasury inflation-protected securities, or TIPS) in January 1997. The TIPS market has experienced rapid growth: Its total value had climbed from $31.06 billion, or 1.45% of the conventional U.S. Treasury market, at the end of 1997 to $305 billion, or 13.5% of that market, by the end of 2005. In countries with a longer issuance history, such as the United Kingdom, inflation-indexed bonds currently account for approximately 40% of outstanding government debt. The Treasury Department reaffirmed its commitment to TIPS and announced that it planned to add additional maturities to TIPS’ issuance cycle. Vanguard expects the TIPS market to continue to grow in importance. Understanding the mechanics of TIPS and how their performance may differ from that of other financial assets in varying market environments is the first step in deciding whether and how to include these securities in an investment portfolio. TIPS make sense for many investors, as their characteristics offer some advantages over those of conventional Treasury bonds. Connect with Vanguard Why inflation-protected securities? traditional bonds, TIPS have a principal value that Investors in traditional fixed income securities have changes; it is raised (or lowered) by the Treasury historically concerned themselves with two broad each month to keep pace with inflation. As a result, types of risk: credit risk and nominal interest rate the semiannual coupon payments to investors also risk. Investors can manage credit risk—the risk change, because they are derived by applying th