A recent report from the U.S. Treasury Department received less press than it should have. The "2025 Financial Report of the United States Government" showed that the gross national debt as of Sept. 30, 2025, was $37.6 trillion. Real-time tracking released in April puts the updated figure at $39 trillion.
That number is difficult to comprehend, but for investors, there is a signal about inflation that shouldn’t be ignored. This isn’t alarmist rhetoric, it’s just math. In 2025, the federal government paid approximately $970 billion in interest on its debt—more than the entirety of the widely publicized defense budget. And as the debt increases, so too will its interest costs.
That means the U.S. government has a motive and the ability to run inflation modestly hot. It’s why there’s a divide between economists and government officials on interest rates. The irony is that the most likely catalyst for rate cuts isn’t a slowing economy—it’s $10 trillion in debt coming due in 2026 that needs to be refinanced at whatever rate the market will bear.
For investors, this presents a case wherein preparing now for higher inflation later is prudent.
The Case for Inflation-Protected Securities
Since 2022, the Federal Reserve has mostly been trying to tamp down inflation. This allowed long-term interest rates (e.g., 10-year Treasury notes) to rise above short-term rates (e.g., two-year Treasury notes). However, when the Fed cuts rates, as it started to do in 2024, the curve begins to flatten.
The wild card is inflation, which continues to be structurally elevated. The central bank’s target rate of inflation is 2%. But the current readings put that number around 2.8% to 3%. If the government needs inflation to run a little hot, a 3% target becomes financially convenient (i.e., lower real debt burden, lower real interest costs).
This idea of using inflation as a fiscal tool has been done before. The most recent example came after World War II, when the country was reducing its wartime debt.
Doing so again would create a situation in which Treasury Inflation-Protected Securities (TIPS) become a rational response for investors looking to stay ahead of inflation. It’s why Series I Savings Bonds were popular in 2022. However, I bonds have limitations, including a $10,000 annual purchase cap and a one-year lock-up period.
That’s why the equity market's offering of TIPS-related securities could be considered inflation hedges for portfolios. Investors should consult their financial planner or tax professional for advice on which, if any, of these investments is right for them.
SCHP: The Core Holding for Broad TIPS Exposure
For investors who want straightforward inflation protection without making a duration bet with TIPS themselves, the Schwab U.S. TIPS ETF (NYSEARCA: SCHP) is a logical choice. The fund tracks the Bloomberg U.S. Treasury Inflation-Protected Securities Index, holding bonds across the short, intermediate, and long maturity spectrums.
Here's why that matters. When the Consumer Price Index (CPI) rises, the principal value of each underlying TIPS bond adjusts upward. Since interest payments are calculated on that adjusted principal, income rises with inflation, too. It's a dual-protection mechanism that nominal Treasury notes don't offer.
With an expense ratio of just 0.05%, SCHP is a low-cost way to gain this exposure. The tradeoff is duration risk. With an effective duration of around 6.5 years, rising real interest rates will pressure the price. For the investor who believes that inflation will stay structurally elevated while the Fed eventually cuts, that's a tradeoff worth accepting.
VTIP: The Conservative Play for Rate-Sensitive Investors
Not all investors are willing to accept duration risk while waiting for Fed rate cuts. For investors who agree that inflation will stay elevated but are less certain about the timing of rate cuts, the Vanguard Short-Term Inflation-Protected Securities ETF (NASDAQ: VTIP) offers a more defensive entry point into the same investment thesis.
The VTIP focuses on TIPS with maturities of zero to five years, keeping its weighted average maturity around 2.5 years. That comparatively short duration means the fund is far less sensitive to real interest rate movements than a broad TIPS fund like the SCHP. If real rates continue rising before the Fed pivots, the VTIP absorbs far less price damage.
The inflation protection mechanism is identical: Principal adjusts with CPI and income follows. But because the bonds mature quickly, the VTIP effectively reinvests into newly issued TIPS at current real yields, giving it a natural repricing advantage in a rising-rate environment.
The expense ratio of 0.07% is marginally higher than that of the SCHP, but it's still negligible. The VTIP is the right tool for investors who want to hedge inflation now without committing to a long-duration view. Think of it as the defensive lineman of the TIPS lineup; it’s not built for upside, but rather to hold the line.
LTPZ: The High-Conviction Bet on Persistent Inflation
If the VTIP is the conservative end of the TIPS spectrum, the PIMCO 15+ Year U.S. TIPS ETF (NYSEARCA: LTPZ) is the other extreme. The fund holds TIPS with maturities longer than 15 years, making it one of the longest-duration inflation-protected instruments available to retail investors. That duration—currently above 20 years—means this ETF moves significantly with changes in real interest rates.
But it's only for investors with a suitable risk tolerance. That’s because long-duration TIPS are the most leveraged expression of the financial repression thesis. However, if inflation persists at 3% or above while the Fed eventually cuts rates to ease the refinancing burden on $10 trillion in maturing debt, long real yields could compress sharply. In that scenario, the LTPZ would benefit enormously from both the inflation adjustment and the price appreciation driven by falling real rates.
The risk is real. If real rates continue rising before that pivot, the LTPZ will fall hard. Its worst periods, including 2022, produced double-digit losses. That’s why this fund should only be a high-conviction satellite position for investors who have both a strong view on the macro thesis and the stomach to hold through volatility.
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The article "$39 Trillion Debt Signal: 3 TIPS ETFs to Hedge Persistent Inflation" first appeared on MarketBeat.
