(Revised June 2024)

Can governments use real bonds such as Treasury Inflation-Protected Securities (TIPS) to tame inflation? We propose a novel framework of optimal debt management with sticky prices and a government issuing nominal and real state-uncontingent bonds. A debt portfolio with both nominal and real bonds helps completing markets unless the monetary policy stance renders them perfect substitutes. Under Full Commitment, the government borrows with nominal debt and accumulates real assets, to be able to use inflation to smooth taxes. With No Commitment, the government portfolio favors real bonds to strategically prevent future governments from monetizing debt ex-post. Quantitatively, our model with No Commitment is consistent with the small and persistent TIPS share in U.S. data. A higher TIPS share mitigates the commitment friction, and effectively curbs inflation.