With the end of the hiking phase in sight, investors focused on macroeconomic developments during the review period, while staying attuned to their policy implications.1 Government bond yields rose in advanced economies (AEs), with term structures reflecting increasingly diverse economic outlooks. Despite a spell of de-risking in August, risk-taking was generally resilient, including in emerging market economies (EMEs).
Notable differences marked the evolution of government bond yields in China, the euro area and the United States. While US long-term yields reached highs not seen since before the Great Financial Crisis, such yields barely rose in the euro area. These dissimilar paths were driven by inflation-adjusted, ie real, yields consistent with a stronger economic outlook in the US than in the euro area. As short-term rates rose in the euro area on the back of stubborn inflation, the term structure there inverted further. Bond yields largely declined in China, amid a faltering recovery from Covid restrictions and monetary policy easing.
US Treasuries were at the centre of heightened market volatility in early August. Yield rises accelerated as investors became more convinced that higher rates were here to stay following better than expected US growth numbers. In addition, several, almost concurrent announcements fuelled investor unease and led to a sell-off: an unexpected increase in the issuance of long-dated bonds by the US government; the greater flexibility in the Bank of Japan's yield curve control policy; and a downgrade of the US sovereign credit rating. The upward pressure on US yields spilled over to other AE government bond markets.
Risky assets held up firmly, but also exhibited some divergence across major economies due to the differing outlooks. Consistent with developments in core bond markets, stock returns were higher in the US than in the euro area and China. Likewise, sentiment in corporate credit markets seemed to improve in the US but remained relatively subdued in the euro area. US credit spreads narrowed below historical landmarks and issuance gained some traction. In contrast, bank lending to firms was still sluggish across jurisdictions.
Financial market developments in EMEs reflected a new phase of monetary policy across most jurisdictions as well as external factors. Short yields fell as the monetary policy stance began to turn, with most central banks pausing rate hikes or implementing cuts. Risk-taking continued, with higher-yielding currencies attracting capital inflows. In August, EME spreads and exchange rates also appeared sensitive to the temporary bout of de-risking in AE financial markets: the appreciation of Latin American currencies came to a halt, speculative positions in currency futures declined, and the rise of long-term yields accelerated. In addition, headwinds seemed to emerge from China's slowdown.
Key takeaways
- Advanced economy government bond yields generally rose, whereas yield curves echoed differences in inflation and economic growth dynamics across jurisdictions.
- Risky asset markets were largely resilient, with stock markets also pricing in the diverging growth outlooks across major economies.
- Financial markets in EMEs reflected differences in policy outlooks and macroeconomic environments across regions, with some de-risking in August amid mounting concerns over the outlook for China.
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