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"The principal CAN go below original face value. I don't have time to find a citation on the TD website to prove I'm correct (which means it is possible I'm wrong), however my understanding is that the value of a TIPS bond CAN go below par. The guarantee is that at maturity, it will be redeemed for par or greater. In the meantime, since the interest payments are based on the current adjusted value, interest payments will be adjusted downward as deflation erodes the current value of the bond."

I couldn't find anything saying this, but looking at the ongoing adjustments what seems to make most sense is this. Your next coupon payment will be 1/2 the coupon (six months) multiplied by the current value of the TIPS, which in theory can be less than face value, if there has been deflation between issue and the coupon payment date. If, at the maturity date, there has been deflation since issue, the TIPS will be bumped up to its original face value. Somehow, if you sell before maturity, this will get factored in.

I'm still betting the IRS has no way of letting you subtract deflation from ongoing taxes on the inflation component.

I would like to figure out what the date for the "reference CPI-U" is for newly auctioned TIPS. Probably there in one of those PDF files for particular issues, from which perhaps inferences could be made.
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