TexasEscapes.com HOME Welcome to Texas Escapes
A magazine written by Texas
Custom Search
New   |   Texas Towns   |   Ghost Towns   |   Counties   |   Trips   |   Features   |   Columns   |   Architecture   |   Images   |   Archives   |   Site Map


Columns

Counties
Texas Counties

Texas Towns
Texas Towns




Columns | Go Far With Kovar

How does inflation affect bonds?

by Taylor Kovar

Hi Taylor: Inflation is having a pretty obvious effect on pricing, but I'm wondering what it means for investments? Do I need to buy bonds, sell bonds, ignore bonds? What's the connection there? - Tim

Hi Tim:
Great question. People talk about interest rates and inflation as they relate to stocks and bonds, but the conversation usually stops short of explaining the actual economics of it. With bonds in particular, you really need to know how this stuff works. So here we go, Inflation, Interest & Bonds 101 with Taylor Kovar!

1. Increasing interest rates are a bond's worst enemy. Your bond's coupon rate, or the annual interest rate, is set at the time of purchase (usually, not always). If interest rates are about to go up, and that's what we're seeing right now, future bonds will have a better yield. That wouldn't matter as much if a bond's value was static, but that isn't the case. When bonds with higher coupon rates become available, the older bonds lose value. This is especially true if you're holding something that now has an interest rate below the current rate of inflation. While your investment won't become totally worthless, it takes a hit in the short term and won't deliver meaningful returns until rates go back down.

2. Inflation is the root of the problem.
The interest rates that hurt your bond's value rise in response to inflation. We've been dealing with an inflation spike for months now, but, as you said, that's been most noticeable with the price of goods. As the markets respond to inflation and the central banks start hiking interest rates in order to curb it, that's when investors consider dumping their bonds. A lot of people view bonds as long-term holdings, but when indicators of an interest hike are particularly strong, investors will sell bonds in advance and then buy again when they can get a better coupon rate. If you wait too long to sell, no one will want your old bond because it won't keep up with the newer, higher-yield bonds.

3. Diversify.
As always, the solution to this problem is to not put all of your investment capital into bonds. Personally, I think stocks may be a better alternative. While bonds are at the mercy of inflation and interest, individual stocks typically keep up with inflation. The "safety" you get from buying a bond comes at the expense of your earning power, and that's playing out in real-time as inflation and interest rates disrupt the bond market.

Prolonged inflation hurts everyone, so let's hope things turn around before too long. Expect interest rates to rise while we wait for inflation to retreat, and act accordingly with your investing-bonds or otherwise. Thanks for the question!


Taylor Kovar January 21, 2022
More "Go Far With Kovar"
Legal Disclaimer: Information presented is for educational purposes only and is not an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. To submit a question to be answered in this column, please send it via email to Question@GoFarWithKovar.com, or via USPS to Taylor Kovar, 415 S 1st St, Suite 300, Lufkin, TX 75901.


More "Go Far With Kovar" ›

More Columns

 


Texas Escapes Online Magazine »   Archive Issues » Home »
TEXAS TOWNS & COUNTIES TEXAS LANDMARKS & IMAGES TEXAS HISTORY & CULTURE TEXAS OUTDOORS MORE
Texas Counties
Texas Towns A-Z
Texas Ghost Towns

TEXAS REGIONS:
Central Texas North
Central Texas South
Texas Gulf Coast
Texas Panhandle
Texas Hill Country
East Texas
South Texas
West Texas

Courthouses
Jails
Churches
Schoolhouses
Bridges
Theaters
Depots
Rooms with a Past
Monuments
Statues

Gas Stations
Post Offices
Museums
Water Towers
Grain Elevators
Cotton Gins
Lodges
Stores
Banks

Vintage Photos
Historic Trees
Cemeteries
Old Neon
Ghost Signs
Signs
Murals
Gargoyles
Pitted Dates
Cornerstones
Then & Now

Columns: History/Opinion
Texas History
Small Town Sagas
Black History
WWII
Texas Centennial
Ghosts
People
Animals
Food
Music
Art

Books
Cotton
Texas Railroads

Texas Trips
Texas Drives
Texas State Parks
Texas Rivers
Texas Lakes
Texas Forts
Texas Trails
Texas Maps
USA
MEXICO
HOTELS

Site Map
About Us
Privacy Statement
Disclaimer
Contributors
Staff
Contact Us

 
Website Content Copyright Texas Escapes LLC. All Rights Reserved