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The notion that businesses and consumers will have to endure high interest rates for longer than initially expected has fallen hard over the past two months, with long-term bond yields plunging from the steepest levels in 16 years.

Bond yields move in the opposite direction to bond prices, and global bonds intensified their rally this week after U.S. Federal Reserve Chair Jerome Powell said the central bank is probably done with rate increases. “Our policy rate is likely at or near its peak for this tightening cycle,” he said Wednesday.

It’s a sharp reversal from October when strategists swapped estimates for how much higher bond yields might go. And since Canadian yields typically move in tandem with U.S. yields, long-term borrowing rates have also dropped here.

“Despite the non-stop narrative of ‘higher-for-longer,’ many global bond yields are going to end 2023 lower than where they began,” Doug Porter, the Bank of Montreal’s chief economist, wrote in a note Thursday.

One reason for the reversal is that U.S. inflation has continued to ease since September as the economy cooled. When yields were soaring, some analysts also questioned whether the U.S. Treasury department’s rapid pace of bond issuances might fail to find enough buyers, though a decision last month to slow the sale of longer-dated debt securities seems to have soothed those fears.

Yet America’s massive deficits aren’t going away, while both U.S. retail sales and the job market beat expectations in November, which could keep pressure on inflation. As Mr. Powell also noted this week, “the economy has surprised forecasters in many ways since the pandemic” and achieving the Fed’s inflation target “is not assured.”

Translation: There may be more U-turns ahead.

Decoder is a weekly feature that unpacks an important economic chart.

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