Investors who are growing more concerned about inflation at last have a way to protect themselves against it. But--incredibly--they're ignoring it. Why?

Some background: On Jan. 29, 1997, in an act of genius and generosity, the Treasury began issuing bonds whose interest payments were indexed to inflation. If inflation rises, you get more money in your pockets. It's a great insurance policy.

Now, for the first time in history, investors can buy bonds that are completely risk-free. Inflation can't erode their value, and payments are guaranteed by the most stable government institution the world has ever known.

(Stocks can also protect against inflation, but since higher interest rates accompany higher prices, the borrowing costs of companies rise and their customers feel the pinch as well. This stock market is particularly skittish about inflation, and with good reason.)

The mystery is that investors haven't rushed out to buy the new bonds. Instead, they have ignored them, and since demand is low, the Treasury has had to boost interest rates to attract buyers. So these bonds, which were a good deal to start with, have now become a spectacular deal.

The bonds--nicknamed TIPS, for "Treasury inflation-protection securities"--pay a base "real" rate of interest that is topped up with an inflation adjustment. The real rate is the bond's coupon, the percentage of its face value that the government promises to pay each year in interest.

The first of the TIPS, issued in January 1997, was a 10-year bond maturing in January 2007 with a coupon of 3.375 percent. The next January, a new 10-year TIPS was issued with a coupon of 3.625 percent. And in January 1999, another was issued with a coupon of 3.875 percent. Notice the pattern here: The rate keeps rising, in part because investors aren't very interested.

Why not? No one really has a satisfying explanation. Dan Bernstein of Bridgewater Associates Inc., a Connecticut firm that manages $2 billion in U.S. TIPS for its clients and that has been investing in TIPS of countries such as Britain and Canada for many years, told me: "You have a relatively new instrument. People are just getting used to it."

Bernstein estimates that, of the $85 billion in TIPS issued so far by the Treasury, only about 2 percent have been bought by individual investors--the rest were purchased by insurance companies and other large financial institutions. One enthusiastic buyer has been TIAA-CREF, the giant pension system that manages the retirement accounts of millions of teachers, which recently started selling stock and bond mutual funds to the public. TIAA-CREF offers a TIPS fund (now with $156 million in assets) for its members only.

The Vanguard Group, an investment firm that had pushed the government to launch TIPS, has no plans to offer a TIPS mutual fund to the public--nor has any other large fund house we could find. A Vanguard spokesman pointed out, however, that individual funds might be buying TIPS for their diversified bond or hybrid portfolios.

In short, TIPS are unloved by the masses. But these bonds are like other investments, including stocks. If some investors are shunning them for no good reason, then they offer a terrific value play for other investors--who can buy them at decent prices.

TIPS are traded on the open market after they are issued. You can buy and sell them through a broker, the way you would any other kind of bond (or stock, for that matter). Again, as with other bonds, as prices go up, yields (the annual interest payment divided by the price) go down.

In the case of all six series of TIPS bonds, however, prices have fallen and rates have risen.

On June 3, for instance, that first inflation-linked bond, maturing in 2007, was yielding 3.86 percent--up from 3.375 percent when it first came out. In other words, if you bought $10,000 worth of these bonds today, you would receive annual interest payments of $386--plus the inflation bonus.

That bonus is paid not on a current basis but instead at the back end, when the bond matures, as part of enhanced principal. With conventional bonds, which are simply IOUs, you lend the government, say, $10,000, and the government promises to pay you the $10,000 back on maturity, plus interest along the way. With TIPS, you might get back $14,000 at maturity, as the extra value builds up because of inflation.

But forget this complication and concentrate on the yield of 3.86 percent. It is, by historical standards, very high. Real interest rates--that is, the rate after inflation has been factored out--have generally been in the range of 2 percent to 3 percent.

On June 3, the rate on a conventional Treasury bond maturing in 2007 was 5.96 percent. Compare the rate on this bond with the rate on the 10-year TIPS and you find that investors are saying that inflation over the next decade will average 2.1 percent a year (5.96 minus 3.86 equals 2.1).

If that inflation estimate sounds a little low to you, it's actually higher than it was six months ago, when the 10-year bond was yielding just 4.6 percent, so the expected inflation rate was actually below 1 percent!

If you firmly believe today that inflation will be less than 2.1 percent over the next eight years, then forget about TIPS. But if you would like to protect yourself against inflation of 2 percent or more, then TIPS seem to present an offer you can't refuse.

Don't forget that, since 1965, inflation, as measured by the consumer price index (which is the standard the Treasury uses for its monthly TIPS adjustment), has risen at an average of 5.2 percent a year. At that rate, an indexed bond you buy today will return an incredible 9 percent annually while a conventional bond is returning less than 6 percent.

There's evidence that investors are just now beginning to catch on. Since March, the prices of TIPS have been rising slightly and yields falling slightly--from a peak, in the case of the 2007 bond, of 3.96 percent. Investors tend to get more interested in inflation protection as they get more worried about inflation.

Still, the bonds appear to be screaming bargains--as substitutes in your portfolio not for stocks but for conventional bonds. And even if inflation doesn't return, wouldn't it be pleasant knowing that you don't have to worry about it?

There are, however, three drawbacks to TIPS:

* Current income. You receive real income in two semiannual checks, but you don't get the inflation bonus until you sell your bonds. Since many retirees, especially, live on their interest payments, TIPS aren't very helpful.

* Taxes. Although you do not receive annual inflation-adjustment checks, you have to pay taxes on the "phantom" income. Say you own a $10,000 TIPS with a coupon of 3.875 percent and the index bonus for the year is 2 percent. You'll pay taxes not just on the $387.50 you receive in real interest but also on the $200 you don't receive. In other words, TIPS are taxed like zero-coupon bonds. For that reason, you are better off holding them in a tax-deferred account such as IRA or 401(k) plan.

* Liquidity. Trading is fierce and continuous in the multitrillion-dollar market for conventional Treasury bonds. But liquidity (the opportunity for turning a financial instrument into cash) is a great deal thinner in the TIPS market.

Still, Bernstein thinks liquidity problems are overblown. "We have no trouble buying and selling," he says. Usually, the "spread"--or difference between the price that potential buyers bid and the price that potential sellers ask is two to three thirty-seconds of a percentage point. That's higher than with normal T-bonds but lower than with most municipal bonds and corporates.

So far, the Treasury has issued a single note with a five-year maturity, three 10-year bonds and two 30-year bonds, which may be the best deal of all. On June 2, these long-term notes were yielding 3.9 percent.

The Treasury has discontinued five-year notes and instead is issuing new 10-year and 30-year bonds, alternating every three months. The next sale is July 7, for 10-year TIPS maturing in July 2009. But of course, you can buy any of the six existing TIPS on the open market right now.

Unless you would rather wait for the rest of the investing world to catch.

Glassman's e-mail address is jkglassman@aol.com; he welcomes comments but cannot answer all queries.