The ratings agencies DO factor inflation risk into their ratings, and are on record multiple times publicly citing inflation risk as a reason. The ratings agenc

The ratings agencies DO factor inflation risk into their ratings, and are on record multiple times publicly citing inflation risk as a reason. The ratings agencies know that default risk is not the only type of bond investment risk and they rate accordingly -- their track record might be questionable but they're not stupid. You are absolutely right with this comment. For those who don't understand what's the problem with inflation so long as the bond is repaid, imagine you buy a 10-year, $1,000,000 dollar bond paying 10% interest from the Weimar Republic in 1918. You get $100,000 per year. By 1923 the Mark is worth a trillion times less than it was when you bought your bond, so the resale value is now the 1918 equivalent of $.000001 and the annual interest income is $.0000001. You complain about this to your friend, and he points out that Weimar is still rated AAA because they obviously can print an infinite amount of money to meet their obligations. Do you feel consoled? What kind of interest rate would you require to consider buying another bond? The United States most likely won't see this kind of inflation because it doesn't have the problems Germany had, but it could certainly see enough to drop the rating to a low A if things really got out of hand.