Painfully high inflation over the last few years has eaten away at the value of money. How can CFOs protect their hard earned or raised cash? Thanks to the U.S. Government, there's an easy way!
What are TIPS?
Treasury Inflation Protected Securities, or TIPS, are bonds issued and backed by the United States Treasury. As the name suggests these types of bonds provide protection against inflation. They are also backed by the US government making them especially safe. Adding TIPS to a sensible cash management allocation can provide a steady stream of income that will keep pace with the cost of running your business.
How do TIPS work?
TIPS maturities range from a few months all the way to 30 years. They are similar to Treasury Bills except the principal moves up or down with inflation. Practically, this means that TIPS yield increases with inflation which means they are an effective inflation hedge.
Let's look at a concrete example. Assume we buy a 1 year TIPS for $99 which means it has a 1% yield:
- If inflation is 10% during that year the value of that TIPS increase to $110 at maturity
- So the total return is $110-$99 = $11 or 11% (1% yield + 10% inflation)
Unlike regular Treasury Bills, that pay a fixed coupon, for TIPS the higher the inflation the higher the yield!
A great tool for CFOs
CFOs look to optimize the finances of their businesses and act as good stewards of the assets on their company balance sheet. TIPS are a great instrument to protect idle cash against inflation while benefiting from a higher yield. Open an account with Treasure today to allocate some of your funds to TIPS.