Is now a good time to buy TIPS?

[Gone4Good]

This means that deflation can cause this $1160 to retreat to $1000. So although you get the "par" principal of $1000 back at maturity, you are NOT guaranteed to get back the inflation-adjusted principal you may have paid on the secondary market. Capische ?

Oh but you are, and you said so yourself. Deflation increases your purchasing power so the $1,000 principal you get back buys as much as the $1,160 you originally invested. So your "inflation adjusted" principal is exactly what you get back (but with the downside capped at $1,000).

Deflation turns everything upside down and backwards.

 

[Gone4Good]

Someone should put together a webpage with a Java applet that lets you enter a TIPS bond you'd like to buy (primary or secondary market) and an anticipated inflation curve over the (remaining) life of the bond. The applet would then generate the resulting expected principal adjustments and interest payments until maturity. This would let you see how these bonds actually work in various inflation scenarios, as well as calculate an inflation-adjusted net return.

I could write the software if I knew the correct algorithm.

I'm pretty sure you'd find that your inflation adjusted return equals the TIPS yield for securities held to maturity.

After tax returns are a different matter, with after tax real returns declining as inflation increases.