What typically happens to yields on inflation-indexed bonds when inflation accelerates?

When inflation accelerates, yields on inflation-indexed bonds typically decrease due to increased demand. Inflation-indexed bonds, such as Treasury Inflation-Protected Securities (TIPS), are designed to provide investors with a hedge against rising inflation. As inflation expectations rise, investors seek these bonds to protect their purchasing power.

This increased demand for inflation-indexed bonds drives their prices up, which inversely affects their yields, causing them to decrease. In scenarios where inflation is expected to rise significantly, investors are more likely to prefer bonds that offer protection from eroding purchasing power, thus further boosting their demand.

In contrast, the other options describe scenarios that don't align with how markets react to inflation. Higher demand resulting in yield increases, unchanged yields amid rising inflation, or the elimination of yields altogether do not reflect the typical market behavior associated with inflation expectations for these types of securities.