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Corporate bond markets raced higher in the fourth quarter as inflation continued to decline, labour market strength showed signs of moderating and Federal Reserve policymakers signaled their rate hiking efforts may be coming to an end.

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Generations of finance students have been taught Efficient Markets theory, but we have always begged to differ. What happened in 2023 to the financial markets and the economy should give anyone pause about how efficient the financial markets really are.

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It was a cruel summer in the bond market as interest rates climbed swiftly higher. Yields across both Canadian and U.S. government curves jumped, hitting levels not seen since 2007.

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Canadians rejoiced the dramatic victory of Nick Taylor who became the first Canuck to win the Canadian Open since 1954. Meanwhile, Canadian bond investors are celebrating a victory of their own, with the return of positive real bond yields. Listen more in the July 2023 Corporate Bond Newsletter

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The global bond market is experiencing the violence of sharply rising yields. Loose fiscal policy and pandemic government income supports combined increasing demand with reduced supply. Prices are soaring to levels not seen in the over 40 years since the high inflation 1970s.

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History books will show the official end of emergency monetary policy accommodation to offset the Covid-19 pandemic came on March 2nd and 16th when the BOC and the Fed raised overnight rates. In reality, the recalibration of bond markets started well beforehand, in response to inflation, and in anticipation of central bank action.

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Central banks have created far more money than necessary for actual economic activity and the result is the highest inflation in 40 years. Interest rates are up, and the financial markets have shuddered, shattered and fallen precipitously in price. Listen here in the July Market Observer.

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Looking at the financial market returns for the third quarter and year-to-date 2022, there was no obvious place to hide as all asset classes suffered. The carnage in fixed income markets is the worst seen in most of our lifetimes.