I'm mainly interested in a finding a medium-term, low risk savings vessel. Bank and Credit Union savings accounts available to me at the moment are all < 1% APY, so inflation-protected securities are attractive to me right now.
First of all, it would be helpful if someone could clarify the difference between TIPS and I-Bonds. There are 3 previous questions on this site tagged with TIPS. There is no separate tag I can find for I-Bonds, although there seem to be a few questions and answers that fit them. The Treasury site has this helpful comparison between TIPS and I-Bonds, but doesn't answer some fundamental questions.
- Are I-Bonds a type of TIPS?
They're Treasury issued and somewhat inflation protected and they're a bond, so a type of financial security. Is this just a case of overlapping names? Naming things is hard.
- Are I-Bonds earnings & interest superior to TIPS?
TIPS imply that they can go down if deflation occurs. Can I-Bonds ever depreciate in value? Also, I-Bonds impose buying limits per person and appear to be non-transferable, implying they have significant benefits over the unlimited, transferable TIPS, which also seem to be available through 3rd-party investment funds.
- Do TIPS and I-Bonds rate fluctuate over the term of the bond?
The current rate for I-Bonds seems to be 1.48% while TIPS recently auctioned for a max of 0.842%. I understand that the two account for inflation in different ways: I-Bonds vary the rate while TIPS vary the principle. How much of this is 'locked in' when I purchase the bond for each? Or are both capable of losing money if significant deflation occurs?
- If I want to hedge some savings against inflation, should I own both I-Bonds and TIPS?
Alternatively, should I buy I-Bonds up to the $10k/year limit and only put excess in TIPS?
Now, what I'm thinking of doing is putting a portion of my cash savings into I-Bonds every year. This savings is currently a small (admittedly undersized) emergency fund that I would like to grow. I've just paid off some credit card debt so I have some funds to start a new investment. Psychologically though, I have hard time justifying growing a savings when the interest rate is so low.
Since I-Bonds are not redeemable for 12 months, I obviously wouldn't want to tie all my emergency funds up in it right away. If I were to gradually move the account to I-Bonds, similar to a CD Ladder, would that be able to double as an emergency fund (fixed dollar amount equal to 3-6 months living expenses) and long-term cash savings (10-20% of non-retirement investments)? Would TIPS be a better vessel for this strategy?
If you don't think that's not a good use of I-Bonds, then where would I-Bonds and TIPS fit into your investment portfolio?