Key points
- Most developed markets central banks have started the process of removing monetary policy support they implemented during the pandemic.
- Central banks are under pressure due to the strong economic recovery and supply-chain disruptions, which have led to high inflation and tight labor markets.
- The hawkish shift by central banks has prompted the market to expect most central banks to raise policy rates multiple times in 2022.
- Government bonds have sold off to start the year. The sell-off has been most acute at the short end of the curve.
- The pace of central bank asset purchases is slowing, with the Fed expected to announce it will stop all purchases after their mid March meeting.
- Economic pressures and expected central bank tightening suggest bond yields have room to move higher this cycle. However, there will likely be fits and starts and technical indicators suggest the recent rise in yields was beginning to look stretched.
- Bond markets have been unusually volatile in recent weeks given uncertainty around the Russia/Ukraine crisis and yields have come off recent highs.
- Expectations related to the duration of the war in Ukraine and its impact on the global economy will be a key driver of rates for the duration of the conflict.