Stock illustration: Market bubble on verge of popping

As inflation ramps up, many market commentators have questioned whether there will be a bond market crash. The Federal Reserve is fighting inflation by unwinding Covid-era monetary policy. Negative-yielding debt is shrinking as fixed-income investors are positioning themselves for interest-rate hikes and the end of large-scale asset purchases by the central bank.

The timing, pace, and magnitude of future rate increases will be critical in determining whether the potential bond bubble deflates slowly over time or experiences a sudden shock.

Over the past decade, declining bond yields, quantitative easing by central banks around the world, and historically low interest rates combined to fuel rapid growth in corporate debt. When the pandemic came along, it pushed these prevailing market trends to extremes. This may have resulted in the “bond bubble” some envision.

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