You must have been living on the moon if did not hear about Standard and Poor’s downgrade of the U.S. credit rating. This has led to steep falls in stock markets around the world and a reevaluation of the United States as a safe haven.
Despite the commotion in financial markets however, the U.S. remain a safe haven, especially given the problems besetting Europe, which I shall reserve for another post.
You can buy various kinds of Bonds and Notes from the U.S. government and if anything, interest rates on all these still-safe instruments will rise as a result of the credit rating downgrade.
One attractive form of investment in government securities is Treasury Inflation-Protected Securities or TIPS. These are marketable securities whose principal changes as the Consumer Price Index changes.
So for example, in an inflation scenario, the principal would be adjusted upward and if there is deflation, the principal is adjusted downward. Interest on TIPS is paid every six months.
When your TIPs matures, you will be paid your (adjusted) principal plus interest, which is a fixed rate. The reason it is inflation protected is the modification upward that takes place when there is inflation. Hence the term “inflation protected”.
The interest rate is applied to the adjusted principal, and can therefore vary from one period to the next. When the TIPS matures, you will receive the principal plus added interest. If there has only been deflation, you’ll receive the original principal only, meaning you can never receive less than you invested.
In order for you to calculate the change to principal resulting from changes in the Consumer Price Index, the Treasury provides TIPS Inflation Index Ratios to allow you to easily.
Personally, I see inflation in the country’s future, so this would be a safe investment to avoid being caught out by high inflation. The minimum investment amount for TIPS is $100 and they can purchased online from TreasuryDirect.gov.
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