Resurgence of bond market brings a positive end to year of market volatility
After years of very low or negative interest rates − and correspondingly low bond returns − investors have reason to be optimistic again, with bond yields starting 2023 at their highest levels in years.
2022 has been the year of runaway inflation and unprecedented volatility. The year started off with interest rates near the zero mark in the United States and in negative territory in the euro area.
With low inflation characterising the best part of the last 10 years, central banks’ priority was keeping short-term interest rates low to stimulate economic activity through investment and spending.
Inflation started to increase slowly in 2021 but this was dismissed as a transitory phenomenon resulting from the disruption brought about by the COVID-19 pandemic.
Central banks were, therefore, hesitant to increase interest rates to rein inflation in, all while governments across the globe were pumping trillions of dollars in stimulus packages into their economies out of fear of them falling into recession.
This failure to act as early as 2021 was, in hindsight, a mistake. Rather than seeing inflation decline during 2022 as was predicted, inflation shot up, in part due to the...