Summary of Marketable Treasury Inflation-Protected Securities
The Treasury Department published final rules on January 6, 1997, which sets out the terms and conditions for marketable inflation-protected securities. The final rules on Treasury marketable securities adopted, without substantive change, the proposed rules that were published for comment on September 27, 1996. Eight comment letters were received in response to the proposal.
The following is a summary of the key provisions and features of these securities:
- The inflation-protected securities are structured similarly to the Real Return Bonds issued by the Government of Canada.
- The interest rate, which is set at auction, remains fixed throughout the term of the security.
- The principal amount of the security is adjusted for inflation, but the inflation-adjusted principal will not be paid until maturity.
- Semiannual interest payments are based on the inflation-adjusted principal at the time the interest is paid.
- The index for measuring the inflation rate is the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (CPI-U), published monthly by the Bureau of Labor Statistics (BLS).
- The auction process uses a single-price auction method that is the same as that currently used for all of Treasury's marketable securities auctions.
- The securities are eligible for stripping into their principal and interest components in Treasury's Separate Trading of Registered Interest and Principal of Securities (STRIPS) program.
- At maturity, the securities will be redeemed at the greater of their inflation-adjusted principal or par amount at original issue.
- If, while an inflation-protected security is outstanding, the CPI is (1) discontinued, (2) in the judgment of the Secretary, fundamentally altered in a manner materially adverse to the interests of an investor in the security, or (3) in the judgment of the Secretary, altered by legislation or Executive Order in a manner materially adverse to the interests of an investor in the security, Treasury, after consulting with the BLS, will substitute an appropriate alternative index.
*Note: Treasury changed references in the auction rules from “inflation-indexed” securities to “inflation-protected” securities (acronym “TIPS”) when the auction rules were converted to plain language (download PDF format, file size-224KB, uploaded 7/28/04, and related correction notice, download PDF format, file size-28KB, uploaded 9/2/04).
Tax Treatment of Treasury Inflation Protected Securities: Generally, the interest payments are taxable when received, which is consistent with the tax treatment of other Treasury securities. The inflation adjustments to the principal are taxable in the year in which such adjustments occur even though the inflation adjustments will not be paid until maturity.
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