How does inflation affect bonds?

How does inflation affect bonds?

Inflation erodes the purchasing power of money, which can negatively impact bond prices. When inflation rises, interest rates typically increase, leading to lower bond prices.

Why do bond prices fall when interest rates rise?

Bond prices fall when interest rates rise because new bonds are issued at higher rates, making existing bonds with lower rates less attractive.

What types of bonds are more sensitive to inflation?

Long-term bonds are generally more sensitive to inflation because they lock in interest rates for a longer period, making them more vulnerable to rising prices.

Are there any bonds that can protect against inflation?

Yes, Treasury Inflation-Protected Securities (TIPS) are designed to protect against inflation, as their principal value increases with inflation.

How can I invest in TIPS?

You can invest in TIPS through a brokerage account, or you can buy them directly from the U.S. Treasury via their website.