Will a high CPI lead to loss in capital appreciation of debt securities as a result of inflation and tighter monetary policies? If so, can the loss/gain in capital growth be directly calculated by the CPI percentage?
Hi @Elvira_Bailey, good questions!
Yes, a high CPI often leads to capital losses in debt securities. The Economic Factors section explains that the Federal Reserve responds to rising CPI with tighter policy, which raises interest rates and reduces the market value of existing bonds. The loss or gain is not calculated directly from the CPI percentage, because it depends on how much interest rates move and on the bond’s duration and structure. The Treasury Products section notes that long-term, low-coupon bonds are susceptible to these changes.
The exception is Treasury Inflation Protected Securities (TIPS). For these securities, the principal is adjusted to reflect CPI changes, which means gains are directly tied to the CPI percentage.
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Thank you,
Mataia
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This was quite helpful. Thank you!
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