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Should you invest in any bond funds? There's low inflation in the U.S. economy at this...

Should you invest in any bond funds? There's low inflation in the U.S. economy at this time. Why do you think that's the case?

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Answer #1

Generally, Bond investors keep in mind three kinds of risk before investing in any bond fund, i.e., Interest rate risk, credit risk, and inflation risk. Inflation risk can be mitigated by investing short-term as inflation can be very uncertain in the long run.

As per the past data, the return on short-term government bonds also known as the treasury bills has mostly been above the inflation rate.

Also, the nominal interest rate is inversely proportional to the inflation rate as per the below equation. As according to economist Irving Fisher, change in inflation has no effect in the change of real interest rate. Therefore, the nominal interest rate will be higher if the inflation rate is going to remain stable in the next few years. So, investing in short-term bond funds will a good idea after careful analysis of credit risk and interest rate risk.

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