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The Collision Course of Inflation and Bonds 

 February 19, 2021

The History of Bonds & Bond Funds 

Investing in various Bonds and Bond Funds has always been considered a less-risky way of investing than being in the equity (stock) markets.

It’s been the “turtle’s way” of making money, and a way to avoid the excitement and anxiety of the roller-coaster equity rides.

For many investors, Bonds make a great, albeit imperfect, way to fixed investing rather than CD investing, which underperforms the rate of inflation.

However, there has always been a risk to investors who have invested in Bonds and Bond Funds.

Bonds & Bond Funds Today

For the most part, the returns of these products have produced single-digit returns over the last three to five years. Luckily, because the prices of energy dropped during the Trump Administration as fracking and energy independence grew. 

And, except for precious metals, virtually all commodity prices also dropped in the last three years. 

But this situation has all changed. 


What to Expect

With the announcement of the closing of the Keystone Pipeline, the closing of public lands for oil and gas development (fracking), awful national weather and general fear in the marketplace, the price of energy has increased dramatically. Gasoline at the pump is expected to increase by $1.00 a gallon. 

And once energy prices increase, then trucking prices increase and then all commodity prices increase—thereby causing inflation. 

The prices of bonds have a direct inverse relationship to inflation: as pressure increases to raise interest rates—and they have already increased at the wholesale and mortgage level—bond values will drop. 

So, the most conservative investors will see an eroding of the values in their portfolios.  

High Yield Bonds and Municipal Bonds will be least affected, at least not right away. Convertible Bonds are at the mercy of their convertibility to actual stocks, and definitely don’t represent “low-risk” investing. 

Next Steps

So - what can conservative investors do with the ugly head of inflation just beginning to pop up? 

  • Remain true to your risk tolerance. If you are a conservative investor, now is not the time to throw this style out the window to chase gold or Bitcoin. 
  • Think about investing in actively managed bond funds rather than ETF indexes or individual bonds. Bond index investing can often cause investors to hold bonds they would prefer not to hold, and individual bonds have the risk of loss of principal at the time of liquidation (or not being able to find a buyer for your bonds).
  • Consider Strategic Income Bond Funds as they generally offer a much more diversified fixed portfolio. 
  • Think about investing your fixed income dollars into Short-Term Bonds or Short-Term Bond Funds. They are generally very liquid and offer less volatility than other Bonds and Bond Funds with better than CD returns
  • Avoid US Treasuries, followed by high-quality corporate bonds and corporate bond funds, which will be negatively affected much earlier by inflation than higher yielding bonds or convertible bonds.

Closing Thoughts

Bond investing can be much more complicated than just finding alternatives to CDs. Ask for professional help.

Elliot Kallen Prosperity Financial Group Wealth Advisor



As always, I look forward to meeting with you over the phone or virtually through Zoom.


All my best,

Elliot Kallen Signature G 1
A note about the passing of Rush Limbaugh

I have always been impressed with individuals, irrespective of race, religion or political affiliation, who spend their lives as trailblazers, especially as we live in the world of criticism for stepping out of the mainstream.

Putting his politics aside, the former talk-show host remained in the number one slot in all of radio for 30 straight years, roughly 1/4 of the time that radio has actually been around.  He changed the face of talk radio, probably forever.  He was sarcastic, funny, punny and critical of the status quo, loved and hated.

As someone who thinks of himself as having a good sense of humor, witty and well-read, I appreciate and admire others who remind me of me, or remind me that I can be better.

Thank you Rush.

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