«Inflation is killing bonds.»

Traders,

They say inflation hurts bonds more than stocks. The current landscape provides a great case study if you ever doubted it. Year-to-date, bond prices have fallen more than stocks. TLT is down 17.7%. SPY is down 12%. No wonder investors are unhappy. They’ve been getting killed on both sides of their diversified portfolios.

There are two ways that inflation hampers bond returns.

① First, it puts upward pressure on interest rates. And bond prices always fall when rates rise. It’s a mathematical relationship, not a fuzzy psychological one. We’re witnessing one of the quickest and biggest rallies in interest rates in history. At the same time, bonds are suffering one of their largest selloffs in history.

② Second, inflation leaches away the fixed returns of bonds. The inflation-adjusted return is negative when inflation is running at 6% and bonds are only yielding 3%.

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