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    Home»Bonds»These bonds protect against inflation. How to optimize them for your portfolio
    Bonds

    These bonds protect against inflation. How to optimize them for your portfolio

    April 28, 2026


    Investors’ inflation fears are reawakening as oil prices resume their ascent and peace talks between the U.S. and Iran remain tenuous. A bond that adjusts for higher consumer costs might be what it takes to assuage some of those worries. President Donald Trump on Saturday called off plans to send U.S. envoy Steve Witkoff and Jared Kushner to Pakistan for negotiations. However, the president and his national security team on Monday discussed a proposal from Iran to reopen the Strait of Hormuz if the U.S. lifts its blockade, White House press secretary Karoline Leavitt confirmed. The uncertainty around next steps was enough to push oil prices higher to kick off the week. International Brent crude oil futures topped $110 per barrel on Tuesday, while West Texas Intermediate futures hovered near $100. Higher oil prices are igniting worries over sticky inflation, which can devour the purchasing power of investors’ dollars, particularly if they’re approaching retirement. This is where Treasury inflation-protected securities, or TIPS, enter the picture. “I think the nice thing about the TIPS ladder is that you can have a lot of certainty in cash flows,” said Jason Kephart, senior principal, multi-asset strategy ratings, at Morningstar. “They’re coming in and they will be adjusted for inflation.” Relatively safe income that can keep up with inflation The principal of a TIPS bond can fluctuate over its term based on inflation, and you receive interest income twice a year. The issues are pegged to the Consumer Price Index for All Urban Consumers . At maturity, you get the greater of the inflation-adjusted price or the original principal – but you will never get less than what you put in. TIPS’ interest income is generally taxable at the federal level, but it’s exempt from state and local levies. Annual inflation adjustments to principal are also taxable for investors holding the individual bonds. Even as TIPS’ inflation-adjusted properties may make them attractive to income-seeking investors, they come with a certain set of risks. For starters, these bonds are still subject to duration risk – that is, the prices on longer-dated issues are sensitive to fluctuations in interest rates. This hobbled long-dated TIPS’ performance in 2022 as the Federal Reserve began raising interest rates. The Pimco 15+ Year U.S. TIPS Index ETF (LTPZ) tumbled nearly 32% that year, while the iShares 0-5 Year TIPS Bond ETF (STIP) slid around 3%. “In 2022, they didn’t do such a good job of protecting your purchasing power, so if we’re in a situation where inflation is high and it leads to higher rates, that can be a challenge for some [TIPS] funds,” said Kephart. He noted that target date funds, which adjust their asset allocation to become more conservative as a stated retirement date approaches, have been shifting toward shorter-duration TIPS and away from their longer-duration counterparts. Individual TIPS, ladders and funds TIPS are just a small part of a diversified portfolio, so investors should incorporate them but avoid building an outsized position. In a hypothetical portfolio that has a 60% allocation toward stocks and 40% in bonds, perhaps 10% might go into the inflation-linked issues, said Ken Nuttall, chief investment officer at BlackDiamond Wealth Management. How you go about getting that TIPS exposure can vary: Investors can purchase TIPS directly from the federal government via TreasuryDirect , where they’re sold for maturities of five, 10 or 30 years. You can buy them in increments of $100. Investors can also work with their financial advisor to build a tailored TIPS ladder – that is, a portfolio of staggered TIPS maturities to help manage interest rate risk. The proceeds of maturing notes can be reinvested into a new TIP to keep the ladder going. “A TIPS ladder for people who want to delay Social Security is kind of like a bridging strategy: You retire at 65 but want to wait until 70, so you do a five-year TIPS ladder to cover your spending needs while you wait,” Kephart said. TIPS-focused ETFs are another way for individuals to tap into the market. You get the benefit of having your TIPS ETF alongside the rest of your investment holdings in your brokerage account, rather than having to navigate the TreasuryDirect site. Be aware that since these funds don’t have a true maturity date, they’ll see price fluctuations. Because of that, the short-duration TIPS ETFs may make more sense, Kephart said. “You have to keep in mind the duration and what the funds are trying to do,” said Nuttall.



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