As expected inflation rises, the purchasing power of the future interest and principal payments from bonds decreases.
What will happen to the bond market if inflation increases ?
Investors become less willing to hold onto bonds with fixed interest rates that will be eroded by higher inflation. As a result, the prices of existing bonds in the market decline.
Bond yields move inversely to bond prices. When bond prices fall due to increased inflation expectations, bond yields rise. As nominal interest rates rise, new bonds issued in the market offer higher yields to attract investors.
An increase in expected inflation may also affect capital flows. Investors may move their funds out of fixed-income securities like bonds and into assets that are better positioned to hedge against or benefit from inflation, such as stocks or commodities.