Abstract

1. It is not surprising that the recent surge in government bond yields across the industrial countries has attracted the close attention of policymakers and market participants alike: the size of the increase was very large for such a short time period, it affected many countries simultaneously, and it was largely unanticipated. While the origin of the increase differed somewhat from country to country, there is by now little doubt that the main factor was a large revision of expectations about economic performance and about the future path of interest rates and exchange rates. The events triggering that revision of expectations were varied. They included a slower than expected fall in European interest rates; stronger than expected growth performance in the United States, along with new information about the timing of the long-awaited turn in U.S. monetary policy; an unexpected, episodic intensification of the U.S.-Japan trade dispute; more buoyant than expected performance of Japanese equities, in concert with larger than expected sales of Japanese Government bonds and a less pessimistic outlook for the economy as a whole; and an unexpected fall in bond and equity prices in emerging markets.

International Capital Markets 1994
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