Why is inflation bad for bonds?

Inflation can be bad for bonds because it erodes the purchasing power of the bond’s fixed payments over time. When inflation rises, the future cash flows from a bond may be worth less in real terms, which reduces the bond’s overall value. As a result, investors demand higher interest rates to compensate for the inflation risk. This can lead to a drop in bond prices and an increase in their yields, which can be detrimental for those holding the bonds. As such, inflation can negatively impact the returns of bond investors, especially if they hold the bond until maturity.

The effects of inflation are often not directly felt but are played out over a long time, especially long-term investments are vulnerable to inflation.


At Horizon65, we created a mobile app that enabled you to check the effect of inflation on your savings.

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