Treasuries, TIPS, & I-Bonds: Inflation Protection

A Treasury bond promises to repay exactly what it says. Inflation is the one risk that promise cannot protect you from — the dollars arrive as agreed and buy less. Two instruments exist specifically to close that gap, and they close it differently.

Last verified 2026-07-28

The risk a Treasury can't insure you against

A conventional Treasury carries essentially no default risk — the government can always pay dollars it issues. What it cannot promise is what those dollars will buy.

Lend $1,000 for ten years at 4% and you receive $40 a year and $1,000 back, exactly as agreed. If prices rose 3% a year over that decade, the $1,000 returned buys roughly what $740 bought when you lent it. Every payment arrived; the purchasing power didn't.

That gap is why economists separate the nominal rate from the real rate — the return after inflation. A conventional bond fixes the nominal and leaves the real one to whatever inflation turns out to be. The two instruments in this lesson invert that: they fix something real and let the nominal figure move.

Two mechanisms for the same job

TreasuryDirect describes TIPS plainly: the principal goes up with inflation and down with deflation, adjusted using the Consumer Price Index. The coupon rate stays fixed but applies to that moving principal — so as prices rise, the same fixed rate produces larger interest payments. Protection enters through the base, and the interest follows.

Series I savings bonds work the other way. The principal stays put and the rate moves: TreasuryDirect notes the overall rate combines a fixed rate that never changes with an inflation rate reset every six months.

Both track CPI, so both do broadly the same job. They differ in how you hold them. TIPS trade, so their price moves with real rates and you can lose money selling early. I bonds don't trade — but they're locked for twelve months and forfeit three months of interest if redeemed within five years.

The cap is what decides which you use

I bonds are capped at $10,000 in electronic purchases per calendar year, per Social Security number. That single rule shapes every real allocation decision here — no matter how attractive the current rate is, $10,000 per person per year is the ceiling.

TIPS have no comparable constraint for an individual. TreasuryDirect's stated auction maximum is $10 million on a non-competitive bid, which is a limit in the technical sense and not one you will meet.

So the two aren't really competitors. For most people the sequence is: use the I bond allowance if it fits, then use TIPS for anything beyond it. The cap is also why I bonds work as a component of an inflation allocation rather than the whole of one — building a meaningful position takes years of annual purchases.