1. National Pension and Institutional Investor Summit
Understanding Treasury Inflation Protected Securities
Kirk Brown, CFA
American Beacon Advisors
December 3, 2009 1

2. Treasury Inflation Protected Securities
Large Cap Value Fund
Treasury Inflation Protected Securities (“TIPS”) – What are they?
TIPS were first issued by the U.S. Treasury in 1997
TIPS are U.S. government guaranteed bonds that protect investors from rising inflation as they guarantee investors a real rate of return above inflation
Similarities with nominal Treasuries
Issued by the U.S. Treasury
Backed by the full faith and credit of the U.S. government
Coupon rate fixed at time of issuance
Coupon payment paid on a semi-annual basis
Coupon payment is calculated as a fixed percentage of principal (however, principal fluctuates with inflation / deflation)
Differences from nominal Treasuries
Principal fluctuates daily based on changes in the Consumer Price Index (CPI-U1), lagged 3 months
Provide protection from deflation as redemption is at the greater of the inflation adjusted principal or original par amount
Coupon rate represents the real rate of return required by investors at the time of issuance
Coupon payments rise/fall with inflation/deflation as the fixed coupon rate is applied to a growing/falling principal balance
TIPS cash flows are more back-end loaded as their real coupons are lower but their principal grows with inflation
1 CPI-U: the nonseasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers, published by the Bureau of Labor Statistics of the U.S. Department of Labor 2

3. Treasury Inflation Protected Securities
Large Cap Value Fund
Treasury Inflation Protected Securities (“TIPS”) – Components of Return
While both TIPS and nominal Treasuries are sensitive to changes in real rates, their exposures differ with respect to changes in expected inflation, the inflation risk premium, and realized inflation.
Return Component
Compensation for…
Component of TIPS Return
Component of Nominal Treasury Return
Expected Inflation
Losing purchasing power due to future inflation No
Yes
Real Yield
Time value of money
Inflation Risk Premium
Bearing the risk of inflation
Realized Inflation
Losing purchasing power due to inflation shocks
The important issue driving TIPS performance versus nominal Treasuries is the performance of realized inflation relative to expected inflation, as any inflation risk premium is typically small.
Nominal Treasury Return = Real Yield + Expected Inflation + Inflation Risk Premium
TIPS Return = Real Yield + Realized Inflation 3

4. Treasury Inflation Protected Securities
Large Cap Value Fund
Treasury Inflation Protected Securities (“TIPS”) – Break-Even Analysis
The break-even inflation rate is the difference in yield between a TIPS and a nominal Treasury of the same maturity. The break-even inflation rate is the inflation rate at which an investor would be indifferent to holding a TIPS or a nominal Treasury, of equal maturities.
TIPS outperform nominal Treasuries when the realized inflation rate, during the remaining maturity of the TIPS, (i.e., CPI-U) is greater than the implied “break-even” inflation rate at the time of purchase
TIPS underperform nominal Treasuries when the realized inflation rate, during the remaining maturity of the TIPS, (i.e., CPI-U) is less than the implied “break-even” inflation rate at the time of purchase
Realized Inflation Over Next Five Years
Example: the yield on a 5-year nominal Treasury is 4.0% and the real yield on a 5-year TIPS is 3.0%. Therefore, the break-even inflation rate is approximately 1%. 1% 2% 3% 4% 5%
10% 0%
+1%
+2%
+3%
+4%
+9%
-1%
+8%
-2%
+7%
-3%
+6%
-4%
+5%
TIPS outperform Nominal
Nominal Treasuries outperform TIPS
TIPS = Nominal Treasuries
Break-Even Inflation Rate
4.0% --
3.0% =
1.0%
Nominal Treasury Yield
TIPS Real
Yield
Break-Even Inflation Rate
Note: For simplicity, the analysis ignores compounding. 4

5. Treasury Inflation Protected Securities
Large Cap Value Fund
0.28
Coupon / Real Return
Inflation Return
Principal Return
1.48
0.27
Period: T1 T2 T3 T4 T5
Inflation Rate: 3% -2% -2% 2% 4% 30
-0.32
0.9
1,000
49.36
TIPS Mechanics
TIPS
Coupon Rate = 3%
Maturity = 5 Years
Principal = $1,000
Maturity Value A B C D E F G H I J
Year
Real Return / Coupon Rate
Original Principal
Real Return/
Coupon Pmt
Inflation
Inflation Adj. Principal
Principal Difference
Inflation Return Pmt
Principal Return
Inflation Return
(B * C)
(1+E) * FT-1
(F – C)
(B * G) 1 3%
$1,000
$30.00
$1,030.00
+0.90 2
-2%
$1,009.40
$9.40
+0.28 3
$989.21
-$10.79
-0.32 4 2%
$1,008.99
$8.99
+0.27 5 4%
$1,049.36
$49.36
+1.48
$1,000.00
Total
$150.00
$2.61
$1,201.97
Note: For simplicity, the analysis assumes annual, rather than semi-annual TIPS interest payments. 5

6. Treasury Inflation Protected Securities
Large Cap Value Fund
Period: T1 T2 T3 T4 T5
Coupon Return
Principal Return 40
1,000
Nominal Treasury Mechanics
Nominal Treasury
Coupon Rate = 4%
Maturity = 5 Years
Principal = $1,000
Maturity Value
Year
Coupon Rate
Original Principal
Coupon Return Pmt
Principal Return 1 4%
$1,000
$40.00 2 3 4 5
$1,000.00
Total Payments
$200.00
$1,200.00
Note: For simplicity, the analysis assumes annual, rather than semi-annual nominal Treasury interest payments. 6