Economics Bonds Questions Medium
The relationship between bond prices and inflation expectations is inverse or negative. When inflation expectations increase, bond prices tend to decrease, and vice versa. This is because inflation erodes the purchasing power of future cash flows, including the fixed interest payments received from bonds. As a result, investors demand higher yields to compensate for the expected loss in purchasing power. This increased yield requirement leads to a decrease in bond prices. Conversely, when inflation expectations decrease, bond prices tend to increase as investors are willing to accept lower yields. Therefore, bond prices and inflation expectations have an inverse relationship.