Abstract
In 1997 the U.S. Treasury introduced Inflation Indexed (or Protected) Securities with substantial promotional fanfare. Yet, due in part to what some in the finance profession have described as a disadvantage placed upon TIPS, many are questioning whether they should appeal to a wide audience. Some, in fact, advise holding TIPS only in tax-deferred accounts. In this paper, the authors develop a framework that allows us to demonstrate that the tax treatment of TIPS is trivially different from that of conventional Treasury securities. Utilizing an after-tax valuation approach, they further show that under relatively conservative projections for inflation, TIPS generally have after-tax yields comparable to, if not exceeding, conventional fixed-rate Treasury securities.
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