How does interest rates and inflation impact bond prices?


Interest rates have an inverse effect on bond prices. Typically as the interest rate go up, the existing bonds that were sold previously at a certain maturity and coupon, now stands devalued as investors can get a newer bond for higher interest payments.  Similarly during inflation as Fed tries to control inflation by raising interest rates it has the inverse effect on bond prices. It is important to note that not all bonds react the same way to interest rates. For example, short term interest rate bonds may feel the impact almost immediately while long term bonds may have a gradual but likely to see more impactful price change. It is important to note that there are Treasury Inflation protected securities, a type of a bond that adjust principal value of the bond based on inflation.