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EGF - Inflation Is NOT The Most Significant Factor Determining Bond Prices
Blackrock Enhanced Government Fund Inc.
One of the pieces of pseudo-science that floats around in popular discussion of bonds is the belief that bond investors are deadly afraid of inflation. In particular, bonds "lose money" every time the Consumer Price Index rises - which is most months, in most developed countries. As far as I can tell, this is the legacy of some Economics 101 textbook story that has been passed on from "expert" to "expert" over the decades.
The correct answer is that nominal yields largely reflect the expected path of the short-term nominal policy rate, and is thus