Most DM bond markets have already priced in substantial rate hikes. Broadly speaking, this would be a natural point for yields to go range-bound and wait for either central banks to catch up with the curve or for compelling evidence of a change in the outlook that would require new interest rates.
The bond market has gone up in flames after a decade of falling yields reversed in a matter of weeks. Starting with low yields, tight spreads and high equity multiples, changing fundamentals — particularly high inflation — led to a wholesale repricing of the markets. As a result, bond and equity returns in the year’s first half were the worst since the 1970s, when inflation and uncertainty were similarly high. The mythology surrounding the “phoenix” suggests a renaissance of the bond market, but this would be too early.
For many developed markets (DM) economies, the peak growth rates achieved this year, and the rapid rise in inflation far exceeds anything seen in the past 30 years. In addition, strong job growth and high inflation triggered a major reassessment of market levels in the first quarter that continued through May.
