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Investors retreated to less risky assets after the devastating Japanese earthquake and tsunami in early March, but this reversed quickly as uncertainty about the economic impact of these events diminished, says the Bank for International Settlements. Since late March, investors have refocused on global growth and inflation prospects as well as possible monetary policy responses.

Bond yields in major developed economies declined on weaker prospects for both global growth and inflation. Prices of many commodities reached a plateau or even fell, lowering the near-term inflation outlook. Investors continued to expect strong growth in emerging markets as they cut back their growth forecasts for the United States. Central banks in emerging market economies tightened monetary policy further, reacting to inflationary pressures from strong growth and past increases in commodity prices.

Widening growth and interest rate differentials between emerging and developed economies resulted in a broad-based depreciation of the US dollar and capital inflows to emerging market bonds and equities.

In May, market participants became increasingly concerned about an eventual restructuring of Greek government debt. Spreads on Greek sovereign bonds widened to record highs. Fears about the wider impact of such an event also fed into higher spreads for other countries and into a marked depreciation of the euro.

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