Why bonds are highly sensitive to high inflation

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Bond markets are usually the first and most directly affected by high inflation.

 

Inflation erodes the real value of fixed interest payments, making bonds less attractive to investors. As a result, bond prices fall and yields rise when inflation expectations increase. Longer-duration bonds are particularly vulnerable because their cash flows extend further into the future.

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High inflation also increases uncertainty around future interest rate paths, contributing to volatility in government and corporate bond markets. Credit spreads may widen as investors demand higher compensation for inflation and credit risk.

Because bonds form the foundation of the financial system, inflation-driven movements in bond markets often spill over into other asset classes.