By Joe Ganley and Gilles Noblet of the Bank’s Monetary Assessment and Strategy Division.
Government bond markets experienced a prolonged rally in 1993. This reflected subdued inflationary pressure—the result of, among other influences, weak commodity prices, and declining output and rising unemployment in some countries. Last year, bond markets entered a protracted period of turbulence and reassessment following the monetary tightening by the US Federal Reserve that began on 4 February 1994. A number of explanations for this turnaround have been put forward, including the changing cyclical conjuncture and technical factors, such as the behaviour of hedge funds. This article gives the results of research exploring the role of monetary policy credibility in the yield changes over the two years.