How Will Bond Funds React To Inflation?
Generally, the market sets interest rates high enough to eke out real, positive inflation-adjusted returns when inflation is relatively moderate and stable. It is during periods of rapid changes in the rate of inflation that things get unpredictable. If you buy a bond fund when inflation is low and inflation suddenly picks up, you might not fare so well in the short term; however, over the long term the bond market should compensate you with positive inflation-adjusted returns. Generally speaking, funds with a longer average maturity will be much more sensitive to changes in the rate of inflation than those with shorter maturities.
