In a high inflation environment, bond yields typically rise. Here’s how it works:

Inverse Relationship

Bond prices and yields have an inverse relationship. When inflation is high, investors demand higher yields to compensate for the decreased purchasing power of future interest payments.

Central Bank Response

Central banks, often raise interest rates to combat inflation. Higher interest rates lead to increased yields on newly issued bonds, which can also push down the prices of existing bonds.

Impact on Different Bonds

Long-term Bonds: These are usually more sensitive to inflation. If inflation expectations rise, long-term yields tend to increase more significantly.

Inflation-Linked Bonds: Bonds like TIPS (Treasury Inflation-Protected Securities) are designed to protect against inflation. Their principal increases with inflation, which can make them attractive in a high-inflation environment.

Investment Strategy

In times of high inflation, investors might favour shorter-duration bonds to minimize interest rate risk, or seek out inflation-protected securities.

Overall, high inflation generally leads to rising bond yields, which can decrease the market value of existing bonds.

Lauren Hua is a private client adviser at Fairmont Equities.

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