Inflation’s Impact on the Bond Market

by | Nov 12, 2023 | Invest During Inflation | 20 comments

Inflation’s Impact on the Bond Market




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The Bond Market and Inflation

In recent years, one of the most talked-about topics in the financial world has been inflation. As prices for goods and services continue to rise, investors and economists have been looking for ways to protect their assets from the eroding effects of inflation. One market that plays a critical role in the fight against inflation is the bond market.

The bond market is a marketplace where investors can buy and sell debt securities, such as government bonds, corporate bonds, and municipal bonds. These bonds are essentially IOUs, with the issuer promising to pay the bondholder a specified amount of interest at regular intervals, and to return the original amount of the bond at maturity.

Inflation has a direct impact on the value of bonds. When prices for goods and services rise, the purchasing power of the interest and principal payments from bonds decreases. As a result, bondholders see the real value of their investment decline over time. This is why inflation is often referred to as the “enemy of bonds”.

However, the bond market also provides a way for investors to hedge against inflation. One of the most popular tools for doing so is inflation-protected securities, or TIPS. These bonds are specifically designed to provide protection against inflation by adjusting the principal value based on changes in the consumer price index. As a result, the interest payments and principal value of TIPS adjust with inflation, providing investors with a reliable hedge against rising prices.

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In addition to TIPS, investors can also turn to floating rate bonds and commodity-linked bonds as inflation hedges. Floating rate bonds adjust their interest payments based on changes in benchmark interest rates, making them less vulnerable to inflation. Commodity-linked bonds, on the other hand, are tied to the prices of commodities such as oil, gold, or agricultural products, providing a natural hedge against inflation.

Another way that the bond market responds to inflation is through changes in interest rates. When inflation rises, central banks may raise interest rates to help fight inflation. This, in turn, can cause the value of existing bonds to fall, as new bonds being issued offer higher yields. Conversely, when inflation decreases, central banks may lower interest rates, causing existing bond values to rise.

In conclusion, the bond market plays a crucial role in the fight against inflation. While inflation erodes the value of bonds, the market also provides investors with tools to hedge against rising prices. From inflation-protected securities to floating rate bonds and commodity-linked bonds, the bond market offers a variety of options for investors looking to protect their assets from the effects of inflation. Additionally, understanding how changes in interest rates impact bond values is essential for investors to navigate the complex relationship between the bond market and inflation.

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20 Comments

  1. Douglas2 Lee

    Peter, please do a couple videos that explain WHY we are setting Record Inflation, especially for food and gasoline. There is a lot of dishonest rhetoric being flung around. Of the various causes being blamed-one is the Ukraine war, the other is higher Fed Reserve and Treasury rates……. I don't believe them. Also, REAL WORLD inflation is 20 to 45 percent or more, on EVERYTHING. The gov lies and reports numbers like 9 percent. But it is 3 to 5 times that. Please explain. And WHO is getting the windfall.?

  2. Robis9267

    This did not age well

  3. Maryn Lyn Hoefer

    I'm dying here. Best mind on the internet, and he speaks, yet I cannot hear.

  4. Eddie Daly

    The UK started raising interest rates from Feb 2022, Eurozone now doing the same.

  5. My Stream

    Wouldn't higher foreign investments in US also contribute to higher demand, higher inflation?

  6. Jay Koval

    Volume on video still too low.

  7. Fred Potgieter

    Putin should pay for children like year wages to every child born .even the Ukraine woman move there have children get the bonus .got a huge surplus 60 billion huge country .no people

  8. Fred Potgieter

    Financial he's right but average people slag flation . recession.cant export with strong currency.poor people can't benefit strong currency for super rich poor need employment

  9. Fred Potgieter

    Not statement Ross Perot made
    He said jobs leaving Americans people .

  10. Justas Pivoriunas

    ECB raised interest rates and intend to rise again in September. So, they can raise them, another matter if it will work.

  11. James Coleman

    "Because of the Russians" is B.S. Europe is the victim of their own arrogance.

  12. S41GON

    The demographics of the people who made the US the strongest country on Easth is also on the decline… its not just a question of demographics, its also the question of whose demographics. Or else I would have to believe that the next economic boom of Sweden will be led by Somalis & Afghans lmao.
    As for the dollars strength, the FED will HAVE TO pivot or else the Democrats will face a catastrophic defeat at the midterms in November and they are panicking because at this rate their policies will surely bring back Trump and they cant have that. The rate hikes have only managed to drive the US economy into a recession, but did nothing so far to stop the inflation. Of course the FED doesnt really want to stop inflation, they NEED inflation to inflate the insane amount of government debt away somehow or else the US would go bankrupt.

  13. BarryS

    You consistently miss 1 thing: internal strife. On all metrics that might predict societal collapse the US scores dreadfully bad. A strong bond market isn't useful if your country is on fire & investors won't come if the coming 2 elections accelerate the situation (which they will). Unpredictable situations lead to more non-linear responses & reactions.

    We are globally turning into a situation where investing isn't a matter of the best option but the least worse option.

  14. David Prugh

    Excellent info and analysis. Unsolicited suggestion – Reshoot this with better sound quality… after you shoot your sound engineer.

  15. ChinatownNoodles

    The audio is soooooo bad…can’t continue watching!

  16. God's child

    Very difficult to hear you

  17. adam day

    Increase the sound, struggling to hear you ! Love all your videos

  18. Thomas Borgsmidt

    Concerning Denmark (and Sweden – inclusive of the temporarily occupied territories of Denmark).

    The basic problem is that the home owners are in debt to well over the realistic sales value of their property. At the same time the most indebted have the largest pension savings. Fairly easy to determine by postal code.

    Inflation? I think not!
    Fuel prices? No, not really! Fuel is heavily taxed and subsidized into "green energy". With negative interest rates a lot of the "green energy" projects might actually be profitable without subsidies. The same with infrastructure projects – When the government can finance them at negative interest rate. We even offer to invest in infrastructure in Germany. Those who retire are mainly schoolteachers, bankers and no-good civil servants and that will actually increase the productivity of the economy – besides nobody CARES if they hang themselves in the attick of their overmorgaged bungalow. (Had an uncle that did that (ok, it was summer cottage) – and it was another Ponzi-scheme – my father hat a very hard time controlling his mirth).

    The problem for the money market now is that the pension funds should pay out the retirement of those with debt – they should pay their taxes – and the idiots won't do that: They are school-teachers after all.

    Actually Denmark has lowered the interest rate by virtue that it has been raised in Sweden (and Norway) and the exchange rate drops so the investors can choose between paying negative interest rate in Denmark or buy high interest rate bonds in Sweden and watch their currency drop with 2-3% annually.
    The problem is naturally the banks. Denmark has one largish bank (Danske Bank – ok 1½ with Nordea) and Sweden has four and Sweden has a population that is nowhere near twice that of Denmarks.

    The main problem is that Germany is lead-footed, but eventually they come around – they are not stupid, just stubborn.

    Mette-girl (as I affectionately call her – nobody else does – she is toughminded to a degree that give Ursula von der Leyen a run for her money – and Ursula puts on makeup wearing brass-knuckles). Even said: We will have to pay Poland for housing the Ukrainian refugees and financial aid to Portugal, Latvia and Rumania is on the table – but let us negotiate prices for the weapons.

  19. EpicMRPancake

    In Australia we're raising interest rates.

  20. Brian Foley

    Great video

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