The Inflation-Linked Bond investment strategy builds on TIAA-CREF’s deep knowledge of Treasury Inflation-Protected Securities (TIPS) to construct portfolios designed to provide a hedge against inflation. 

In 1995, TIAA-CREF provided pricing analysis and, with the United States Treasury, sponsored a conference on the prospects for U.S. inflation-linked securities.

The idea of the inflation-linked bond originated in the 1780s with bonds issued by the Massachusetts Bay Company. These bonds were linked to the prices of consumer items such as meat, eggs, and clothing. The idea then lay dormant until the 1950s when the nation of Iceland issued such bonds. 

The modern inflation-linked bond market began in earnest in the 1980s. The first inflation-linked bonds in the modern era were issued by Great Britain. Other governments such as Japan, Australia, Canada and many European countries soon followed. The United States government did not issue such bonds until 1997.

Today the U.S. government offers two types of inflation-linked bonds, and depending on your investment horizon, either could be a smart way to battle the ravages of inflation.

I-Bonds

The first inflation-linked bond issued by the U.S. Treasury is called an I-Bond and it is basically a regular U.S. savings bond with inflation protection pegged to the CPI index. The I-Bond has a fixed rate of return plus an inflation premium. 

The inflation premium is adjusted every May and November by the Treasury Department. The fixed rate assigned when the bond is purchased is good for as long as the bond is held. 

The major benefit of inflation-linked bonds, such as TIPS, is that the outstanding principal of the bond rises with inflation. So when inflation rises, so does the face value of the bond. This is in sharp contrast to most other types of securities. In addition, once the face value of the bond is adjusted upwards due to inflation, the interest paid will increase based on the adjusted face value. 

The major downside to inflation-indexed bonds occurs during a period of deflation. The U.S. Treasury, however, does put a floor under the prices of their inflation-linked bonds. A bond which was originally issued with a face value of $1,000 will be redeemed for no lower than the original $1,000 face value. 

An investor buying an already-issued TIPS bond, which may trading above the $1,000 face value, could lose money if the bond fell back to the $1,000 face value in a deflationary period. 

Since inflation is much more assured over very lengthy time frames, inflation-indexed bonds remain a safe and popular investment for long-term investors planning for their child's college education or for their own retirement. 

With the purchase of inflation-linked bonds, longer-term investors can rest assured that their investments can overcome inflation's corrosive effects and retain their long-term purchasing power, but as with all investments do come risk, so be aware.