TIP holds US Treasury Inflation-Protected Securities — government bonds whose principal value adjusts with the Consumer Price Index, ensuring that the real purchasing power of the investment is preserved against inflation. When inflation rises, TIPS principal increases and investors receive inflation-adjusted interest payments; when deflation occurs, the principal adjusts downward though is floored at par at maturity. The fund's yield of around 5.8% reflects both the real yield component and the current inflation adjustment embedded in prices. TIPS provide direct inflation hedging within a fixed income allocation, outperforming nominal Treasuries when actual inflation exceeds what was priced into the market and underperforming when inflation surprises to the downside. Duration is meaningful — approximately 7 years — creating interest rate sensitivity that means rising real yields can cause price losses even when inflation is high. The TIPS breakeven rate — the difference between TIPS yield and nominal Treasury yield — is the market's implied inflation expectation and a useful indicator for assessing relative value. For investors, TIP is the most direct way to hedge inflation risk within a bond portfolio, appropriate as a complement to nominal bonds in environments where inflation uncertainty is elevated or when real yields are attractive on an absolute basis.
