What happens to bonds when inflation goes up?

When inflation goes up, the value of bonds typically goes down. This is because inflation erodes the purchasing power of the fixed payments that bonds offer. As a result, investors demand higher interest rates to compensate for the loss in purchasing power. When interest rates rise, the value of existing bonds decreases because they offer a lower return compared to newly issued bonds with higher rates. This is known as interest rate risk. Inflation can also lead to uncertainty and volatility in the bond market, which can further impact bond prices. Overall, rising inflation can negatively affect the value of bonds in investors’ portfolios.