What is the impact of inflation on bond prices?

What is the impact of inflation on bond prices?

Inflation generally leads to higher interest rates, which can decrease bond prices. When inflation rises, the purchasing power of future bond payments diminishes.

Can you explain why higher interest rates affect bond prices?

Sure! When interest rates rise, new bonds are issued at these higher rates, making existing bonds with lower rates less attractive. This causes their prices to fall.

Are there specific types of bonds that are more affected by inflation?

Yes, long-term bonds are typically more sensitive to inflation than short-term bonds. This is because they lock in lower interest rates for a longer period.

What can investors do to protect themselves from inflation?

Investors can consider inflation-protected securities, like TIPS, or diversify their portfolios with assets that tend to perform well during inflationary periods.