You can buy TIPS directly from the U.S. Treasury at one of its TIPS auctions. There are several good reasons for buying TIPS from auctions.
Although it’s an auction, you don’t really enter a bid as you do in an eBay auction. Only financial institutions who buy TIPS in the millions bid in the auction. You get to tag along with a so-called “non-competitive bid.” It means you will accept the final price from the auction no matter what it turns out to be.
Although it sounds like completely lack of control, it’s actually one of the best features of a Treasury auction, because all orders — from the big guys, and you — get the same lowest price (highest yield) from the auction. Your small order for $1,000 is treated the same as a $100 million order from a bank.
Actually your order is treated a little better because you are guaranteed to receive the full quantity of your order, while some big guys who bid too low either won’t get any bond or will only get partial quantity. Being able to buy TIPS at wholesale prices is the primary reason for buying TIPS from auctions.
Another good reason for buying TIPS from auctions is that the bonds sold at auctions are either brand new or issued within the last three or six months. Because they are “fresh” they don’t have a lot of accumulated inflation in their principal. They have better protection for deflation.
A disadvantage of buying TIPS from auctions is that you have to wait for the scheduled auctions. Auctions don’t come very often. If you missed the date, you will have to wait for the next one. The choice of maturity is limited to what Treasury chooses to sell. You also won’t know the exact price or yield before you decide to buy. If you are willing to live with these limitations, buying TIPS from auctions is a great way to invest in individual TIPS.