Do Bond prices go down because investors are anticipating increased inflation?

Question

Are there other reasons? What are the main factors that affect Bond prices? I'm still trying to figure out the bond market. A substantial portion of my 401K is in a bond fund, and it's been doing terribly this year. I thought bonds were supposed to be a safe haven from the volatility of the market, but they seem to be just as risky, or more, than small-caps or emerging markets.

Answer 1

The big three determiners of bond prices are: changing interest rates, changing financial picture of the issing company, and asset allocation changes because of money moving from or to other investment vehicles.

First, when a bond is issued, its interest rate is set. The value of the bond itself, up or down, adjusts the yield to the bond holder. So if interest rates go up, bond holders can get more for their money elsewhere, so the prices of the bonds go down. Sellers are wanting to move their cash so they settle for less and buyers are only wanting the bond if the price is such that the yield is comparable to what they would get elsewhere considering the relative risk of the debtor company.

Second, if the company is suffering a setback because the business environment changed, or because management has been less diligent than expected in handling its fiscal affairs, then the credit rating will suffer. The lower the credit rating the higher the relative risk of the bond principle, the lower the bond prices will be. People who are more interested in the return of their money than the return on their money will bid up bonds whose credit ratings are higher. Again, this takes money from those of relatively weaker credit, which drops those issues in value.

Finally, bonds surge or suffer often in opposition to what stocks do. If stocks are battered, money comes out to await a more favorable market condition. Where does it go? Often to bonds, especially bonds of solid companies, so bond prices rise.

Answer 2

Depending on age you should never have a substantial portion of a 401k in a bond fund. Maybe some when well into 50s. You are not looking to find a safe haven but rather to beat inflation & taxes so you can retire in comfort. Great yr for stocks & you missed it. They are not "just as risky or more than small caps/emerging markets" at all but they are an inappropriate investment in this environment for a retirement acct. Nothing to figure. Inflation = bad for bonds. Fed raising rates + bad for bonds. Fed said they were going to raise rates so you had to move out then. Don't get trapped by thinking you are conservative when you are the 1 risking your future by trying to hide. Bank cds lose purchasing power vs taxes & inflation over time. So do bonds.

Answer 3

It depends on the bond yield and the inflation price. Most of the major bonds are bought now from foriegn sources (mostly China) that has a different inflation rate than the U.S. The whole idea is to get the best deal possible (bonds vs stocks vs certain physical iteams such as metals, oils and art) and at least beat inflation.

When inflation goes up, stocks go down because the cost of doing business eats into profits.

When inflation goes up, historically metals, art, oil ect. go up because these things can be used sold in other countries where the currency is more stable (therefore a forex trade).

Now about bonds. Historically bonds go up when inflation hits, but because China and other countries have bought so many bonds the yield isn't worth it. Already bond yields are too low for U.S. buyers because the yield doesn't beat inflation plus taxes. Therefore in today's economics, bonds fall as well as stocks when inflation goes up. Who wants a 4.7% yield on a bond in an economy with 7% inflation (that's to prove the point, and not that the U.S. inflation rate is 7%)? Nobody. Back in the early '80s with inflation runnning at 11%, simple 30 year EE bonds got as high as 13% on their yields. That was the time to buy bonds and therefore the price of bonds would have gone up. Back in the '80s though, it was the U.S. citizens that was mostly buying U.S. bonds and they demanded a better yield so they could beat inflation.

Answer 4

Bond prices go down because investors are anticipating higher nominal interest rates. Higher nominal interest rates, in turn, could be caused by either higher inflation or higher real interest rates.

As to bonds being less risky, the risk of a bond depends on its duration. Duration, in turn, is a function of current yield and maturity; bonds with lower yield and longer maturity have higher duration. So it's not impossible for a bond with low current yield and long maturity to be as risky as stock. If you want to minimize risk in bonds, you should stick to short-term bonds.

Answer 5

A lot of factors already discussed but so what. Just follow the bond yield curve and how it changes weekly. Bonds are also long term investments. You just looked at this year. Think 5 years from now or at retirement.

Answer 6

I think bond market and stock market are tied together. When stocks go us - bonds go down and vice versa. Inflation brings the stocks down and makes bonds and metals (gold, platinum and silver) to go up.

Answer 7

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