From Morningstar:

In 2023, the bond market broke a two-year losing streak, but it was a white-knuckle ride for investors due to extreme volatility. A return to generally higher interest rates suggests that investors should not expect the relatively placid conditions seen in bonds throughout the 2008 financial crisis to 2022 to return.

The extreme volatility in the bond market can be seen through standard deviation, which measures the variability of returns. In 2022-23, the average standard deviation on bonds more than doubled, indicating a significant increase in volatility.

Inflation, the economy, and the outlook for Fed policy are to blame for the extreme volatility in the bond market, especially post-crisis. The expectation of Fed rate hikes and cuts led to wild price swings, with the Fed’s move away from capping interest rates causing extreme shifts in market expectations.

Despite a potential transition from inflation volatility to growth volatility, bonds are likely to remain relatively volatile in 2024. The risk of an economic growth acceleration, or a decline into recession, means investors should consider tail risks and not solely rely on consensus expectations.



Read more: Why Have Bonds Been So Volatile?