(Too long; didn’t read resume at the end of the article. I strongly invite you to at least check the charts, which are worth 1,000 words.)
Since 2020, the bond market, traditionally seen as the safest and most liquid market, has experienced unprecedented dynamics (at least compared to recent times).
Many factors are responsible: Quantitative Easing from the post-Great Financial Crisis and COVID period, the consequent tightening from central banks, and global governments’ spending addiction.
From 2008 to 2021, low inflation and a somewhat sluggish economy required easy monetary conditions to stimulate job creation and every other positive aspect that a more efficient labor force creates (including the quintessential credit creation).
Inflation is closely tied to government bond yields; with slowing inflation, longer-run government bond yields have been held between 0% (or even negative) to 2% throughout most economies in that same period.
This phenomenon allowed governments to subsidize companies and programs to boost the economy, using what is vulgarly called “cheap money creation”.
One could debate that it now has broadly negative consequences, but without it, the COVID era would have led to a decade-long recovery process and a much more considerable economic crisis.
However, as the economy quickly recovered from the COVID crisis, inflation rose sharply (close to 10% year-over-year) in the US, Canada, Europe, and throughout the globe.
This caused bond yields to shoot higher, leading to higher inflation expectations and forcing central banks to hike interest rates aggressively from 2022 to 2023.
