Choose a nominal Treasury when fixed-dollar cash flows fit your goal; consider TIPS when you want principal and interest linked to U.S. inflation. Neither is universally better: compare securities with similar maturities, account for the price risk if you sell early, and understand that TIPS inflation adjustments can be taxable before you receive the money.
How nominal Treasury notes and bonds work
Treasury notes and bonds set a fixed coupon rate at auction and pay interest every six months. The principal is fixed in nominal dollars. Notes are offered at 2, 3, 5, 7, and 10 years; bonds are offered at 20 or 30 years. See the Treasury’s overview of marketable Treasury securities.
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A fixed coupon does not mean a fixed market value. If market yields rise above a security’s coupon, its price generally falls below par; if yields fall below the coupon, its price generally rises above par. Selling before maturity can therefore produce a gain or loss. Treasury explains the relationship between pricing, coupons, and interest rates.
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How TIPS work—and what they protect against
Treasury Inflation-Protected Securities (TIPS) have a fixed coupon rate set at auction, but Treasury adjusts their principal using non-seasonally adjusted U.S. City Average All Items CPI-U. The coupon is calculated on the adjusted principal, so the rate stays fixed while the dollar amount of each six-month interest payment can rise or fall. Treasury offers 5-, 10-, and 30-year TIPS. The TreasuryDirect TIPS overview describes these terms.
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When inflation raises adjusted principal, coupon dollars can increase; when the index falls, adjusted principal and coupon dollars can decline. At maturity, Treasury pays the greater of the adjusted principal or the original principal. That minimum repayment applies at maturity—not to a sale beforehand. TIPS can be sold before maturity, and their market prices can fluctuate. The official auction-rule summary specifies the CPI-U index methodology.
CPI-U linkage is not a guarantee that a TIPS investment will track your personal cost of living exactly. Your household’s expenses and inflation experience may differ from the index.
Compare the features that affect your decision
| Feature | Nominal Treasury notes and bonds | TIPS |
|---|---|---|
| Principal | Fixed in nominal dollars | Adjusted with CPI-U; can rise or fall |
| Coupon | Fixed rate; dollar payments are based on original principal | Fixed rate applied to adjusted principal; dollar payments vary |
| Inflation exposure | Inflation can erode the purchasing power of payments | Principal and coupon dollars follow CPI-U adjustments |
| Repayment at maturity | Face amount | Greater of adjusted principal or original principal |
| Sale before maturity | Market price may be above or below par | Market price may fluctuate; the maturity floor does not set an early-sale price |
| Federal and state/local tax treatment | Interest is federally taxable; Treasury interest is exempt from state and local income taxes | Interest and annual inflation adjustments are federally taxable; Treasury interest is exempt from state and local income taxes |
| Useful comparison | Nominal yield and fit with nominal cash-flow needs at a matched maturity | Real yield and fit with CPI-U-linked needs at a matched maturity |
These are structural differences, not a performance ranking. A TIPS real yield can be negative at auction; a positive coupon rate does not by itself mean the investment has a positive real yield.
What the breakeven inflation rate tells you
A common rough comparison is the nominal yield on a Treasury and the real yield on a TIPS with a similar maturity. Their difference is often called breakeven inflation, or market inflation compensation. If inflation over the relevant period is higher than that difference, TIPS may outperform the matched nominal security before taxes and other differences; if inflation is lower, the nominal security may outperform.
Breakeven is not a forecast or a guaranteed return threshold. Market yields can reflect liquidity and risk premia as well as expected inflation. Compare current yields only when they are dated and drawn from reliable, current market information; the difference is useful only when maturities are reasonably comparable.
Choose based on the expense, horizon, and access to your money
For a known nominal expense
If you expect to pay a fixed-dollar bill on a known date, a nominal Treasury maturing near that date may offer cash flows that fit the liability. Its market price can still move before maturity, so the fit is strongest when you can hold it to maturity and its terms match your plan.
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For CPI-U purchasing-power exposure
If your concern is that inflation will erode the purchasing power of money over a matching horizon, TIPS provide CPI-U-linked principal and coupon amounts. That linkage follows Treasury’s index methodology, not an individual household’s exact basket of expenses.
If you may need to sell early
Either security can be worth less than its purchase price when you need to sell. TIPS’ principal floor at maturity does not prevent an early-sale loss. Consider the possibility of needing cash before choosing a maturity.
Compare similar maturities
A 5-year TIPS and a 30-year nominal bond differ in more than inflation treatment: time to maturity and sensitivity to changing rates also differ. Compare a nominal Treasury yield with a TIPS real yield of a similar maturity to make the inflation-compensation comparison more meaningful.
Individual securities and bond funds are not interchangeable
An individual security has a stated maturity date. A bond fund’s holdings and duration can change, so its behavior is not the same as holding one Treasury to maturity. The terms above describe individual marketable securities, not a comparison of specific funds.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Understand the tax timing before buying TIPS
TreasuryDirect says Treasury interest is subject to federal tax and exempt from state and local income taxes. For TIPS, annual inflation adjustments are also reported as taxable income on Form 1099-OID, even if the security has not matured and the adjustment has not been paid to you in cash. This can create federal tax before you receive the adjusted principal, sometimes called phantom income. See TreasuryDirect’s tax-form guidance. Your individual tax result depends on your circumstances; check current tax-year guidance or consult a qualified tax professional.
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Marketable Treasuries can be purchased at auction or in the secondary market through TreasuryDirect, banks, brokers, or dealers, and can be sold before maturity. Auction schedules, current offerings, yields, and secondary-market prices change, so verify current terms with the seller or Treasury before acting. Treasury’s marketable-securities FAQs cover secondary-market access.
TIPS are marketable securities, while Series I savings bonds are non-marketable savings bonds with different purchase, redemption, payment, and tax rules. They are not interchangeable products; Treasury summarizes the distinction in its comparison of TIPS and Series I bonds.
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