Well, current ibonds do have a negative real rate of return after taxes, but I can think of a lot of good reasons to hold them, if even just for an emergency fund. I agree the real return (<0 real) is not a recipe to get wealthy. Now, that being said, the "Risk Adjusted" return on these suckers is excellent. Basically Zero risk and comes close to keeping up with inflation. Also, the overall risk adjusted return of the entire portfolio is what matters, so they could certainly have a place. Also, they serve to "extend" your tax protected space since taxes are deferred until redemption. One last thing, during times of deflation, you will never get back less than the face value.
But what about TIPS? Everything with 5 year maturities and up last I looked had a positive real return after inflation. You need to hold them in a tax protected account due to the phantom tax issues. As for return of principal you also might want to buy new issues at auction and hold to maturity. In times of deflation, you can lose the inflation increased principal value, so some risk here, especially if bought in the open market after an increased inflation adjustment to the principal.
A couple more thoughts on i bonds:
1) I haven't done this, but I understand the preferred way to purchase with a tax return is to do your taxes like normal (in march, whatever), then file an extension and make a payment with enough extra to buy the $5k of ibonds plus a little more. Then, a week or so after the money has left your checking account, file your taxes requesting the $5k in i bonds. No need for estimated taxes
2) You can buy 10k of i bonds as an individual, through a revocable trust, and if you are a business owner, through a business. If you are married and you have two or three trusts (not uncommon), you can see where this can get to $60k without any gifting ($20k/person, $30k/trusts, $10k/business).
3) As others have noted I have no idea where to get a guaranteed risk free rate of return (yes, i know less than 0 real) i bonds are giving right now with no risk. Yes, it's the unexpected high inflation that created this situation, but I can rid myself of them 1 year after purchase if I wish, or more likely one year and 3 months if inflation cools and the rate on the bond is adjusted lower
4) If these things ever start paying real rates above inflation again, they would be that much more interesting.
OK, that's enough, just my $0.02. It's worth what you paid for it